US Fed Rate Cut: Why Foreign Investors May Start Short-Covering In Indian Markets?

The Fed's 25 bps cut to 4.00-4.25% with guidance that more easing is likely this year arrived largely as priced; the new information is the dovish bias with a lone dissent for 50 bps. From India's vantage point, that's a mild tailwind for risk assets—helpful for liquidity and sentiment, but not a regime shift.

For India, an easier U.S. policy can improve global liquidity and may prompt FPI short covering. If the U.S. dollar stays weak and global bond yields drift lower, the rupee should be better supported, and a part of the foreign outflows seen earlier in FY25 could reverse.

Flows matter because foreign positioning into India has been cautious in 2025. NSDL data shows that with net outflows of Rs 91,497 crore as of September 17, 2025, foreign portfolio investors (FPIs) have been mostly net sellers in 2025 so far. The most pressure has been on equity, which has experienced net outflows of Rs 1.39 lakh crore so far in 2025 till Sept 17.

The dollar and US yields will be the main conduits for transmission. As investors interpreted Powell's "risk-management" rhetoric and a gradual easing path, the dollar strengthened in early post-FOMC trade. Although short-term INR fluctuations may be erratic, the overall outlook is for a weaker USD as cuts mount.

A persistent dollar slide lower would be beneficial for India's FX and local markets, since empirical evidence from BIS indicates that the broad dollar is a major driver of EM local asset flows, frequently outweighing basic rate differentials.

"A softer dollar and lower global yields raise the odds of short-covering and measured re-risking by foreign investors, particularly in liquid index futures and heavyweight financials, where positioning has been cautious. We would frame the flow impulse as "less negative" rather than "red-hot positive," but even that shift can compress risk premia at the margin," said Karthick Jonagadla, Managing Director & CEO, Quantace Research and Capital Pvt Ltd.

Sectoral, Indian IT should see some relief if U.S. sentiment stabilises. Gartner projects 2025 global IT spending to expand roughly 8-10% (around $5.6 trillion), driven by AI-led data center capex and resilient software budgets.

"If U.S. CFOs gain incremental confidence as the Fed eases, discretionary programs that were deferred in H1 could restart in CY25, lifting deal volumes and utilisation for large-cap Indian vendors. We'd still anchor expectations: relief from "less bad" demand beats is more plausible than a full-blown upcycle," commented Karthick Jonagadla.

The domestic profit cycle continues to be the medium-term driver of Indian equities. In spite of global cross-currents, the RBI maintains FY26 real GDP growth at 6.5%, whereas the NSO's most recent report indicates Q1 FY26 GDP growth at 7.8% YoY.

"Tactically, we view the Fed's move as liquidity-positive for India's big-beta pockets where FPIs are underweight, sentiment-supportive for quality IT (benefiting from better U.S. tone, resilient cloud/AI spend, and strong deal pipelines), and volatility-dampening for INR and local rates if the dollar softens further. Strategically, we stick to an India-first framework: domestic GDP and earnings trajectories will dominate total-return math over 6-12 months, with global easing an additive buffer," Karthick Jonagadla commented.

The tailwind's main risks are a slower-than-signaled Fed policy, a further jump in global risk premia, or a re-firming dollar if U.S. data surprises hawkishly.

"Overall, we see this as a small tailwind, not a big driver. Over the medium term, Indian equities will be shaped more by India's own GDP growth, earnings delivery, and policy execution than by the Fed's rate path. Keep an eye on the dollar index (DXY), U.S. 10Y yield, daily FPI flows (NSDL), and RBI commentary," stated Karthick Jonagadla.

But with markets having already priced a 25 bps move before the meeting, incremental guidance toward more cuts—without hinting at policy stress—keeps the balance of probabilities constructive for Indian markets in the near term.

Disclaimer

The views and recommendations expressed are solely those of the individual analysts or entities and do not reflect the views of Goodreturns.in or Greynium Information Technologies Private Limited (together referred to as "we"). We do not guarantee, endorse or take responsibility for the accuracy, completeness or reliability of any content, nor do we provide any investment advice or solicit the purchase or sale of securities. All information is provided for informational and educational purposes only and should be independently verified from licensed financial advisors before making any investment decisions.