What is the U.S. Federal Reserve and How Does It Impact the Indian Economy?

The U.S. Federal Reserve, which is also known as the Fed, is one of the most powerful financial institutions in the world. Its decisions not only impact the U.S. economy but also financial markets across the globe, including India. Recently, the Fed announced that it would keep interest rates between 4.25% and 4.50%, affecting global markets and economic growth forecasts. In this article we will understand what the US Federal Reserve is, why it matters, and its influence on India's economy.

What is the U.S. Federal Reserve?

The U.S Federal Reserve is the Central bank of the United States. It was established in 1913 to manage the country’s financial system and to ensure economic stability. The Federal Reserve History Organisation mentions: “The Federal Reserve System is the central bank of the United States. Founded by an act of Congress in 1913, the Federal Reserve’s primary purpose was to enhance the stability of the American banking system.”

The Fed is responsible for the following things:

• Setting interest rates to control inflation and economic growth.
• The management of money supply in the financial system. 
• Regulation of financial institutions like banks. 
• To maintain financial stability during an economic crisis. 

The Fed has a very crucial role in the global economy. Whenever there is an economic crisis, like the 2008 financial crash or the COVID-19 pandemic, the Fed takes action to stabilise markets and support economic recovery.

Who controls the U.S. Federal Reserve?

The Federal Reserve Chairperson is one of the most influential figures in global finance. According to the Federal Reserve Government website, the U.S. President appoints the Fed Chair, but once appointed, the Chair acts independently of the government. Even the White House cannot directly remove them.

The Fed Chair leads the Federal Open Market Committee, also called FOMC, which makes important decisions about interest rates and monetary policy. These decisions impact global financial markets, including Indian stock markets and foreign investments.

When Did the Latest Federal Reserve Announcement Happen?

The latest Federal Reserve policy announcement took place in March 2025. The key highlights of this announcement were:

• Interest rates to remain unchanged at 4.25%-4.50%
• GDP growth forecast for 2025 was reduced from 2.1% to 1.7%
• Inflation is expected to rise, with the Personal Consumption Expenditures (PCE) inflation rate projected at 2.7%

This decision was closely watched by investors, economists, and financial experts worldwide.

Where Does the Federal Reserve’s Impact Reach?

The Federal Reserve’s policies do not just affect the U.S. economy, but they have an impact globally. Countries like India, China, and other emerging markets feel the effects of changes in U.S. interest rates.

When the Fed keeps interest rates high, foreign investors prefer to keep their money in U.S. bonds and assets rather than invest in emerging markets like India. However, when the Fed lowers interest rates, investors move their money into countries like India, boosting stock markets and economic growth.

Why Does the U.S. Federal Reserve Matter to India?

The Federal Reserve’s decisions influence the Indian economy in multiple ways:

1. Impact on Indian Stock Markets

• A stable or lower U.S. interest rate attracts Foreign Portfolio Investors (FPI) to Indian stock markets.
• If the Fed raises interest rates, investors pull money out of Indian markets, leading to a stock market decline.
• After the latest Fed announcement, experts predict that India’s stock market will remain strong as investors continue to look for growth opportunities.

2. Influence on the Indian Rupee

• The dollar strengthens when the Fed raises interest rates, making the Indian rupee weaker.
• A weaker rupee increases import costs, making items like oil, electronics, and machinery more expensive in India.
• If the Fed lowers interest rates, the rupee stabilises, and India's import costs reduce.

3. Foreign Investment Trends

• Foreign investors follow the Fed’s interest rate decisions before investing in India.
• In the past, when the Fed kept interest rates low, India saw strong foreign investments, boosting sectors like technology, real estate, and manufacturing.
• Recently, between October 2024 and March 2025, FPIs withdrew $28 billion from India, but experts believe they might return due to stable interest rates in the U.S.

4. Sector-Wise Impact in India

After the latest Federal Reserve policy, certain Indian sectors have shown positive growth trends:

• IndiGo Airlines: Strong growth due to new international expansion plans.
• Defence Stocks: Companies like Mazagon Dock, Cochin Shipyard, and Garden Reach have seen stock prices rise.
• Sugar Industry: Stock prices are increasing due to low production forecasts.
• NTPC (National Thermal Power Corporation): Investors are optimistic about India’s energy sector.

How Will India Benefit from the Federal Reserve’s Decision?

The big question is whether the Fed’s policies will help or hurt India’s economy. There are both risks and benefits:

Positive Effects:

• Stable U.S. interest rates mean more foreign investments in India.
• The Indian stock market may continue its upward trend.
• The rupee may remain stable, keeping inflation under control.

Risks and Challenges:

• If U.S. inflation rises, the Fed may increase interest rates in the future, affecting India.
• Global uncertainties, including geopolitical tensions and oil prices, can still impact India’s economy.

Overall, India is in a strong position, and the latest Federal Reserve policy is likely to support India’s economic growth in 2025.

Conclusion: What’s Next for India?

The U.S. Federal Reserve’s decisions are closely watched by Indian investors, businesses, and policymakers. While the latest announcement has stabilised global markets, future changes in U.S. interest rates and inflation will continue to impact India.