US Fed Keeps Rates Unchanged: What the January 2026 FOMC Means for India

The US Federal Reserve held its first policy meeting of 2026 on January 27–28 and decided to keep interest rates unchanged at 3.5–3.75%.

The decision was expected. After cutting rates three times in late 2025, the Fed has now decided to pause and assess how the economy and inflation evolve over the next few months.

Why the Fed Chose to Pause

According to the Fed, the US economy is still growing at a steady pace, but inflation remains above the 2% target.

• Economic activity continues to expand
• Job growth has slowed, but unemployment remains stable
• Inflation has cooled from earlier highs but is not yet low enough

Because of this mix, the Fed does not see urgency to cut rates further right now.

During the press conference, Jerome Powell said the central bank will remain data-dependent and will not rush into decisions. He also reiterated that the Fed operates independently and is not influenced by political pressure.

What the Fed Is Indicating for 2026

Although rates were held steady, the Fed has not ruled out future cuts.

• Market expectations (CME FedWatch) suggest possible cuts later in 2026
• June or December are currently seen as the more likely windows
• Upcoming meetings in March and April will be watched closely for changes in tone

For now, the Fed wants clearer evidence that inflation is moving sustainably towards their target.

Immediate Impact on India

The Fed’s decision is neutral to mildly negative for Indian markets in the short term.

1. Global Liquidity

With US rates unchanged, liquidity in risk assets remains tight US 10-year Treasury yields are still around 4%+, keeping capital parked in bonds rather than equities. This has contributed to continued FII outflows from Indian equities, limiting near-term support for emerging markets.

2. US Dollar and Rupee

A steady Fed has kept the US dollar firm, which continues to pressure the rupee. The Indian rupee, now near ₹91.96/USD, has weakened roughly 5–6% over the past year, reflecting sustained dollar strength and reduced global risk appetite.

3. FII Flows

Higher US yields continue to make American assets attractive, contributing to foreign institutional investor (FII) outflows of around ₹1.53 lakh crore from Indian equities in 2025, and continued selling into early 2026. Domestic institutional investors (DIIs) have helped offset some of this pressure with steady buying activity.

Market Reaction in India

Indian equities opened flat to slightly weak after the Fed decision.

• IT stocks faced pressure due to dollar strength
• Auto stocks underperformed on cost and currency concerns
• Broader markets stayed range-bound

There was no sharp sell-off, indicating that the decision was already priced in.

RBI’s Likely Approach

With the Fed on hold, the Reserve Bank of India is expected to keep rates steady around 5.25% through most of 2026.

The RBI’s focus remains on:

• Managing inflation
• Supporting the rupee
• Maintaining financial stability

Aggressive rate cuts without Fed support could increase currency pressure, which the RBI is likely to avoid.

What to Watch Going Forward

Key factors that will matter for Indian markets:

• US inflation and wage data
• Direction of the US dollar
• FII flow trends
• Fed communication in upcoming meetings

A clear shift toward rate cuts by the Fed would be positive for Indian equities, especially large caps, banks, and IT stocks.

The Fed is waiting for stronger evidence that inflation is under control before cutting rates again. For India, this means short-term pressure from global factors, but no change to the long-term growth outlook.