Global Rate-Cutting Cycles and Their Impact on Emerging Markets: India's Policy Reforms as a Catalyst for FDI and Equity Gains

The global monetary landscape in 2025 has been defined by a coordinated easing of interest rates, with central banks in both developed and emerging markets responding to slowing growth and easing inflation. While the U.S. Federal Reserve has moved cautiously, cutting rates by 25 basis points in October 2025, other major central banks-including the European Central Bank and the Reserve Bank of New Zealand-have adopted more aggressive dovish stances. This divergence in monetary policy has created a favorable environment for emerging markets (EMs), where capital inflows and currency stability have improved. Among these EMs, India has emerged as a standout performer, leveraging structural reforms and monetary easing to attract record foreign direct investment (FDI) and bolster equity market gains.

India's Monetary Easing: A Strategic Response to Global Shifts

The Reserve Bank of India (RBI) has cut its key interest rate by 100 basis points in 2025, adopting a neutral stance to support economic momentum while maintaining financial stability according to the central bank's official announcement. This easing aligns with global trends but is uniquely tailored to India's domestic context. For instance, the RBI's rate cuts have coincided with a revised GDP growth forecast of 6.8% for FY 2025–26, driven by robust manufacturing and services sectors. The central bank's policy has also benefited from a narrowing current account deficit and strong services exports, which have reinforced investor confidence in the rupee.

The impact of these measures is evident in India's FDI inflows. In FY 2024–25, the country recorded FDI inflows of over $50 billion, a 13% increase compared to the previous fiscal year. This growth has been fueled by India's liberalization of FDI norms, including 100% foreign ownership in sectors such as manufacturing, infrastructure, and agriculture under the automatic approval route. The services sector, in particular, has attracted significant attention, accounting for 19% of total FDI inflows in FY 2024–25.

Sector-Specific Reforms: Manufacturing, Services, and Technology

India's policy reforms have been sector-specific, targeting industries critical to its economic transformation. The government's decision to increase the FDI cap in the insurance sector to 100% for companies reinvesting their entire premium domestically has further enhanced its appeal to global investors. Similarly, the liberalization of FDI in manufacturing-bolstered by initiatives like the "Make in India" program and the National Manufacturing Mission-has positioned the country as a global manufacturing hub.

Data from the Department for Promotion of Industry and Internal Trade reveals that FDI equity inflows in the manufacturing sector surged by 69% from $98 billion in 2004–2014 to $165 billion in 2014–2024. In FY 2024–25, the services sector alone attracted $116.15 billion in FDI, with computer software and hardware accounting for 16% of the total. These figures underscore India's ability to attract capital in high-growth sectors, even amid global uncertainties such as U.S. tariffs and supply chain disruptions according to recent financial analysis.

Equity Market Resilience and Foreign Investor Confidence

India's equity markets have mirrored the optimism generated by its policy reforms and monetary easing. The BSE Sensex rose by 3.9% in April–September 2025, with broader indices like the BSE MidCap and BSE SmallCap outperforming. This resilience is partly attributed to strong foreign portfolio investor (FPI) participation, which saw a notable rebound in May 2025 according to market reports. The government's efforts to streamline regulations-such as the Jan Vishwas 2.0 bill-have further enhanced the ease of doing business, reinforcing India's reputation as a stable investment destination.

The interplay between monetary policy and equity performance is also evident in the repo rate's influence on capital flows. While lower repo rates may reduce returns on fixed-income instruments, they signal a supportive environment for growth-oriented sectors. This dynamic has been particularly beneficial for India's technology and services sectors, where FDI inflows have driven innovation and scalability.

Conclusion: A Model for Emerging Market Growth

India's strategic combination of monetary easing and sector-specific reforms has created a virtuous cycle of FDI inflows and equity market gains. By aligning its policies with global rate-cutting trends while addressing domestic structural challenges, the country has positioned itself as a key beneficiary of the current monetary environment. As central banks in developed economies continue to ease, India's proactive approach-coupled with its robust economic fundamentals-suggests that its growth trajectory will remain resilient in the coming years.