On Wednesday, September 18, the US Federal Reserve cut interest rates by 50 basis points, marking the first reduction over four years. In its announcement, the Federal Open Market Committee (FOMC) stated that considering the progress on inflation and the balance of risks, the Committee chose to lower the target range for the federal funds rate by 0.50% point to 4.75% to 5%.

This move is likely to boost foreign investment in India, impact the Indian Rupee, and benefit sectors such as IT and consumer goods. The RBI’s response will be crucial for maintaining financial stability.

This action indicates the beginning of a policy change to ease the restrictive conditions previously implemented to control inflation.

The Fed’s decision to decrease interest rates will lower the rates at which commercial banks lend to consumers and businesses, thereby reducing the cost of borrowing across various financial products, including mortgages, auto loans, and credit cards. This reduction is expected to make borrowing more affordable, stimulating increased spending and investment.

The impact of the Fed rate cut will be experienced globally. In the past, US interest rates have impacted Indian monetary policy. However, Reserve Bank of India (RBI) governor Shaktikanta Das has indicated that India is not obligated to follow suit and lower its rates.

The RBI governor stressed that maintaining financial stability is a top priority for the central bank. Das emphasised the importance of ensuring a strong and resilient financial system, stating that Financial stability is a key consideration.

Das’s remarks imply that the RBI will thoroughly evaluate the domestic economic conditions and potential risks before deciding on interest rates.

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