The Fed’s neutral rate for the U.S. economy is estimated at about 3.25%. In 2024, the U.S. Federal Reserve Board reduced the Federal Funds Rate from 5.375% to 4.375%. Today, after an extended pause, they cut it again from 4.375% to 4.125%. More importantly, the Fed signalled two additional rate cuts in 2025, which would bring the Federal Funds Rate down to 3.625% by year-end, still slightly ahead of the neutral rate. There is more room to cut rates in 2026.
Historically, when the Fed lowers rates, capital tends to shift out of safe assets such as U.S. Treasuries and bank deposits into riskier assets, including equities, private equity, venture capital, and emerging markets. The anticipated rate cuts in 2025 and in 2026 are expected to boost the valuations of risky assets.
As a result, India should expect stronger capital inflows—particularly in Q4, when large global asset managers finalize allocations. This comes at a time when the Indian economy is demonstrating resilience, even in the face of headwinds such as the Trump administration’s imposition of a 50% tariff on Indian exports. Overall, India stands to benefit from a “double engine” of global liquidity easing and strong domestic fundamentals.