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Introduction
On September 18, 2024, Jerome Powell, the chair of the US Federal Reserve, walked up to the microphone and announced something financial markets around the world had been anticipating for over a year. The Fed was cutting its benchmark interest rate by half a percentage point, the first reduction in four years. Within hours, the Sensex and Nifty climbed, the rupee moved, and news anchors started explaining what carry trades are to a confused but curious viewership. The whole event felt distant, a room full of economists in Washington making a decision about American monetary policy. But here is the thing: that single decision is now quietly making its way through almost every part of the Indian economy, from petrol prices at your local bunk to the annual report of your favourite IT company.
The Price of Borrowed Money
Interest rates are the price that people and companies pay for borrowing money. When you take a home loan, the bank charges you interest because it is renting out its money for a period of time. Central banks like the Reserve Bank of India or the US Federal Reserve set a benchmark rate that shapes what every other lender in the country charges. The RBI, for its part, watches its American counterpart closely, and for good reason. The Fed’s benchmark rate carries a weight beyond American borders, because the US dollar is the world’s reserve currency. Almost all international trade and cross-border lending runs through dollars, which means that when the Fed changes the cost of borrowing dollars, it pulls a lever that is wired into nearly every economy on the planet. India, which runs large trade accounts in dollars and borrows significantly in foreign currency, has always paid careful attention to what Powell and his colleagues decide.
How America Ended Up Needing a Cut
The story of Powell’s September cut begins in 2020, during the pandemic. Supply chains seized up globally, and the US government injected roughly five trillion dollars in relief funds into its own economy at exactly the moment when there was less to buy. Prices soared, and US inflation hit a 40-year high of 9.1% in mid-2022. The Fed responded by raising rates eleven times over the next two years to make borrowing expensive enough to slow spending down. It worked, but with a cost: US unemployment, which had touched a record low in April 2023, started creeping upward toward 4.2%. A useful early-warning tool named after economist Claudia Sahm flags that when the three-month average unemployment rate rises by 0.5% from its lowest point in the past year, a recession is probably already beginning. That threshold was crossed in 2024, and the Fed decided to cut before the slowdown could deepen into something more serious.
The 2% inflation target that Powell has been steering America back toward carries a surprising origin story. It was not invented in Washington. In 1988, New Zealand was battling years of runaway price rises, and Finance Minister Roger Douglas set a public goal of returning inflation to between zero and 2%. That number was gradually adopted by central banks around the world, including the US, which formally embraced it in 2012. A pragmatic target announced on New Zealand television nearly four decades ago now shapes monetary decisions for the world’s largest economy, which is either a testament to a good idea or a reminder that global financial norms spread in deeply unpredictable ways.
India Watches the Dominos Fall
What happened in Indian markets the day after Powell’s announcement was not coincidence, it was the carry trade working exactly as designed. The carry trade is a strategy where investors borrow money cheaply in a low-rate country like the US and deploy it in a higher-rate market like India, where returns are better. When the Fed raised rates through 2022 and 2023, US assets became more attractive and capital flowed out of emerging markets. When the Fed cuts, the calculation reverses: dollars become cheap to borrow, and investors seek higher returns elsewhere. India, with its relatively strong growth momentum and better-yielding assets, becomes a destination. More foreign money flowing in means greater demand for rupees, which puts upward pressure on the currency and tends to lift stock markets along with it. The movement in Indian indices on the morning of September 19 was, in a very real sense, a direct mathematical consequence of a decision made in Washington the previous day.
The Bill That Comes Later
A weaker dollar, however, is not entirely good news for India, and Powell has signaled that more cuts are likely through 2025, which means this dynamic is not going away any time soon. Indian IT companies, which collectively exported about 245 billion dollars in services in the financial year 2023, earn most of their revenue in dollars. When those earnings get converted back into rupees, a weaker dollar means fewer rupees for the same volume of work, squeezing margins without any change in actual business performance. The other pressure point is crude oil. When the dollar weakens, commodities like oil become cheaper for buyers holding other currencies, which drives up global demand and pushes prices higher. India imports roughly 85% of its crude oil, so a sustained rise in oil prices shows up quickly in transport costs, power bills, and the price of everything that needs to move from one place to another.
Final Thoughts
Jerome Powell’s rate cut is the beginning of a sequence, not a single event. The Fed has indicated it plans to bring its benchmark rate down to a range of around 3 to 3.5% through a series of reductions over the coming year. For India, each step in that journey will carry the same double picture: an easier environment for capital inflows and a steadier rupee on one side, and quiet pressure on IT revenues and an oil import bill that does not stay still on the other. The carry trade, the Sahm Rule, and the 2% inflation target that started in New Zealand are all parts of the same machinery. Powell’s announcement in Washington was the first lever being pulled, and the rest of the machine is only now beginning to move.