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US Fed Announces Third Successive Rate Cut; India Likely to Hold Repo at 5% in 2026
BoB: The US Federal Reserve has cut interest rates for the third consecutive time, bringing the total reduction to 75 basis points in 2025. The weak labor market and lack of economic data due to the shutdown are key factors in this decision. According to Bank of Baroda economist Dipanwita Majumdar, India's repo rate may remain stable at 5% in 2026.
The Federal Reserve of the US has announced that it has a third successive cut in interest rate towards the end of December. The Fed has lowered the federal funds rate to 3.50% to 3.75%. A cumulative total of 75 basis points has been cut in 2025. This understanding has occurred when the conditions in the US labor market are still weak, along with a government shutdown that has interrupted fresh economic data.
Bank of Baroda’s economist, Dipanwita Mazumdar, explained that in view of present worldwide trends and Indian circumstances, it seems that India’s repo rate would remain unchanged at 5% in 2026.
This policy of the Fed will greatly affect world financial conditions, and emerging nations must take this into consideration in their monetary policies. Mazumdar noted that the policy rate differential between India and the US has remained largely contained. This is due to the RBI cutting interest rates more rapidly than in the US. The interest yield differential has also followed a similar trend to the policy rate differential, supporting foreign investment (FPI) flows in the initial months.
She added that, however, rupee volatility has impacted investment flows in recent times. Going forward, we expect the policy rate differential between India and the US to remain at the current level.
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The report further states that the higher yield differential between India and the US will support foreign direct investment (FPI) flows in the near term and is expected to strengthen the currency somewhat. The inflation differential will also tilt in India's favor due to control of domestic food prices.
The Reserve Bank of India (RBI) last week reduced the repo rate to 5.25% from 5.50%. The cash reserve ratio (CRR) remains unchanged at 3%, and the standing facility rate has been reduced to 5% from 5.25%.
