The US Fed’s rate cut and bond purchases could attract FPIs to India and support the rupee

A customer holds Indian hundred rupee notes at a roadside exchange office in New Delhi | Photo credit:

The US Federal Reserve cut interest rates by 25 basis points to a range of 3.50 to 3.75 percent. As part of the liquidity injection measures, the company also announced that it will purchase approximately $40 billion worth of government bonds every month.

Amit Pabari, MD, CR Forex Advisors, noted that the US Fed’s latest actions – a 25 basis point rate cut (third cut in a row since September) and the decision to resume bond purchases of around $40 billion per month – mirror what the RBI has done recently: cut rates and inject liquidity into the system. In fact, both central banks eased their policies at the same time.

More liquidity

Pabari believed that from a currency perspective, when the Fed adds liquidity by buying government bonds, the supply of dollars increases, which typically weighs on the dollar. A softer dollar generally supports emerging market currencies, including the Indian rupee.

That said, the extent of the dollar’s weakness may be limited. Fed Chairman Jerome Powell signaled a more cautious approach, saying the Fed is “well positioned to wait and see how the economy develops,” he said.

The updated dot chart also points to only one rate cut in 2026 and another in 2027, suggesting the Fed is not entering a deep easing cycle.

“For India, the overall impact is constructive. Interest rate spreads remain stable since the RBI’s cut has been effectively matched by the Fed. This helps maintain a stable FPI debt flow to India.

“Higher global liquidity tends to favor risky assets. As dollar liquidity rises, risk sentiment improves globally, which could translate into continued or stronger equity inflows globally, as well as in emerging markets,” Pabari said.

Furthermore, a slightly weaker dollar plus stable inflows is generally positive for the rupee. The rupee closed at a record low of 90.4825 per US dollar on Thursday, weighed down by India’s delay in finalizing a tariff deal with the US and demand from importers.

The Indian currency (INR) closed around 52 paise lower against a previous close of 89.9650 per US dollar (USD). On Thursday, the INR surpassed the previous week’s record low of 90.43 per dollar.

Naveen Vyas, Senior Vice President of Anand Rathi Global Finance, said the Fed’s 75 basis point rate cut by 2025 is expected to boost global liquidity and lower US bond yields, prompting investors to seek higher returns in emerging markets such as India. This tends to increase FPI inflows into Indian equities and debt.

“So far in 2025, FPI has sold $17.7 billion worth of Indian equities. We expect this to moderate and could lead to FPI inflows in 2026 as well. Overall, Fed rate cuts create a positive environment for Indian markets through higher capital flows, supportive currency trends and stronger investor sentiment,” he said.

However, the Fed’s new bond purchasing plan is neutral for the Indian market as this new plan is not the same as the large-scale quantitative easing (QE) programs of the past. Those previous programs included massive bond purchases across the curve and were aimed at strongly stimulating growth and markets.

Vyas noted that the current move is more of a technical step to ensure there is sufficient liquidity in the US banking system and money markets. As a result, the impact on FPI flows to India will be helpful, but not transformative. The larger drivers of foreign investment flows will still play a role in the Fed cutting rates.

Published on December 11, 2025