When the US Federal Reserve reduced its interest rate by a quarter percentage point last week, establishing the target range at 3.75-4 per cent, it was not a bold stimulus but rather a cautious act of navigation. A prolonged government shutdown has left the Fed operating with limited information on inflation and jobs. For India, this development influences the global cost of capital, investor behaviour, and the overall pace of trade.
The rate cut was determined under extraordinary conditions. US GDP grew at an annualised rate of 3.8 per cent in the second quarter, but more recent indicators suggest a cooling trend. Unemployment has risen to 4.3 per cent, job creation has decelerated, and consumer spending is stabilising. Although inflation has decreased to approximately 3 per cent year-on-year, it still exceeds the Federal Reserve’s 2 per cent target. Typically, policymakers would review fresh September data before making decisions, but since those reports never came, the Federal Reserve had to rely on August data.
A budget impasse in Congress has resulted in the shutdown of significant portions of the US government, suspending key statistical releases and furloughing thousands of employees. The Bureau of Labor Statistics has delayed employment and inflation updates, while the Department of Commerce has halted some price and trade data. Federal Reserve Chair Jerome Powell acknowledged that the central bank was “operating with incomplete visibility,” a rare admission that monetary policy is now being formulated in the absence of complete data.
Within the Federal Open Market Committee, there was a sharp divergence of opinions. Fed governor Stephen Miran voted against the modest 25-basis-point adjustment at both the September and October meetings, advocating instead for a half-point reduction to support a labour market showing clear signs of stress.
Conversely, Kansas City Fed president Jeffrey Schmid opposed any cut at all, a stance supported by Dallas Fed’s Lorie Logan and Cleveland Fed’s Beth Hammack, who cautioned that inflation, still exceeding the target, could resurge if policy were relaxed too swiftly. Faced with this division, Powell chose a middle path: implementing a smaller reduction now, coupled with a pause in balance-sheet reduction starting December.
That political paralysis has emerged as an economic variable in its own right. The government shutdown could potentially cost the US billions each week. More critically, it indicates that fiscal dysfunction, rather than merely inflation or unemployment, now influences the parameters of monetary risk. A central bank compelled to operate without data risks either over- or under-correcting, with either error likely to echo across global markets.
Also read: US govt shutdown begins after Senate fail to pass funding bill amid partisan deadlock
Cheaper money, costlier choices
As interest rates in the US decline, global liquidity increases, prompting investors to seek higher returns abroad. India, with its expanding markets and ongoing reforms, emerges as an attractive destination. Following the Fed’s announcement, Indian bond yields had decreased and equities stabilised, indicating early signs of renewed foreign interest.
This development is timely for the Indian economy, which is heavily investing in infrastructure. Under PM Gati Shakti initiative, projects worth Rs 13.59 trillion are underway, while the Sagarmala programme is modernising over 230 ports and coastal facilities. These initiatives are central to India’s strategy to integrate manufacturing with new trade corridors across Africa and ASEAN. The availability of cheaper global capital enables India to finance logistics and energy infrastructure at reduced costs, potentially enhancing its competitiveness over the next decade.
However, capital flows are invariably accompanied by a side current — the exchange rate. The US Dollar Index (DXY), which measures the dollar against major currencies, remains stable near 99-100 following a previous 0.4 per cent increase. Concurrently, the rupee opened weaker at Rs 88.41 per US dollar, down from Rs 88.20, as Powell’s indication that a December cut was “not assured” strengthened the dollar. Rising treasury yields, with the 10-year yield increasing by eight basis points and the 2-year yield at 3.6 per cent, have moderated expectations of a rapid liquidity influx.
For India, the immediate balance is complex. A weaker rupee increases import costs, yet overall stability limits inflation risks. With the Brent crude priced around $76 per barrel, the import bill remains manageable, even as exporters face challenges from slowing global demand. The outcome depends on whether this rate cut revitalises US growth or merely acknowledges its stagnation. The United States remains India’s largest trading partner, purchasing approximately 17 per cent of its exports. If American demand stabilises, India maintains its position; if it declines, liquidity alone will not sustain exports. As former RBI governor Raghuram Rajan once warned, “Liquidity cannot buy growth; it can only postpone the reckoning.”
Also read: US Fed’s rate cut is likely good news for India. It may also help temper RBI’s stance
India’s window to build
Such a warning often even doubles as advice. Despite prevailing global uncertainties, India is presented with a strategic opportunity for action. The current environment of reduced borrowing costs presents an advantageous moment to initiate long-term projects aimed at capacity expansion rather than merely stimulating demand. The India-Middle East-Europe Economic Corridor (IMEC) and the developing Indo-Pacific maritime connections have the potential to integrate India into the evolving global supply chains. Should the economic deceleration in the United States prove to be temporary, India will have enhanced its infrastructure in anticipation of recovery; conversely, if the slowdown persists, these investments will serve to bolster economic growth.
At the same time, a quieter transformation is taking place within the financial sector itself. As the yields on the dollar go down, the incentive to hold the currency diminishes, thereby indirectly supporting India’s initiative to conduct trade in rupee denominations. The Reserve Bank of India has sanctioned the establishment of special Vostro accounts with over twenty nations, including Russia, the UAE, and Sri Lanka, to facilitate trade settlements in local currencies. A depreciating dollar and abundant liquidity provide an opportunity to explore the rupee’s potential regional role. This represents a cautious yet significant step towards monetary autonomy.
The Federal Reserve’s October decision highlights the fragility of the global economy as it continues to navigate post-pandemic disruptions, alongside the resilience of nations prepared to adapt. This decision illustrates how the United States, affected by shutdowns, can inadvertently generate opportunities elsewhere. For India, this situation presents an opportunity to secure financing at lower costs, expand trade, and establish itself as a stable anchor within a volatile system.
However, optimism should be tempered. Should the US economic slowdown solidify into a recession, even ample liquidity will not shield exporters or investors. This moment captures a persisting truth of economics: we can steer the ship, but we cannot control the weather. The message for India is clear: the current calm in global financial markets and favourable capital flows present an opportune moment to develop infrastructure, trade routes, and confidence strong enough to endure future challenges.
Bidisha Bhattacharya is an Associate Fellow, Chintan Research Foundation. She tweets @Bidishabh. Views are personal.
(Edited by Prashant)