How Fed Interest Rate Decisions Shape the Cost of Capital for Indian Businesses

When the US Federal Reserve pushed its benchmark rate to a 23-year high of 5.5% in 2024, the shockwaves weren’t confined to Washington. Indian markets reacted within hours — 10-year G-sec yields climbed to around 6.76%, mirroring the global move.

For Indian CFOs, these numbers aren’t just headlines. Fed decisions shift the global risk-free benchmark, influence capital flows, and move the rupee — all factors that directly affect your cost of capital, borrowing strategy, and overall financial planning. Ignoring them isn’t an option; understanding them is now a necessity for steering FY 2025–26.

What Happens When the Fed Changes Rates?

Any change in the US Federal Reserve’s policy rate quickly affects India’s debt markets and currency valuations. For Indian businesses, borrowing costs, WACC (Weighted Average Cost of Capital), and imported inputs respond quickly, and your balance sheet can feel the impact almost immediately.

How Fed Rate Decisions Affect Indian Business Costs

1. US Fed Rate Hike - Benchmark rate hits 5.5% in 2024, triggering global capital reallocation.

2. Dollar Strengthens & Capital Flows Shift - Foreign investors rotate funds to US assets; INR depreciates 1–3% in days.

3. Indian Market Impact - 10-year G-sec yields rise to ~6.76%; domestic loan rates (MCLR/EBLR) increase.

4. Imported Costs & Margins - INR depreciation raises imported raw material costs; hedging becomes more expensive.

One of the clearest channels is through the currency and FX market:

• Dollar strengthens: Fed hikes make US assets more attractive.

• Capital flows shift: Foreign investors rotate funds into the US, pulling money out of emerging markets like India and dampening emerging market investments across sectors.

• INR depreciation: For instance, in August 2022 and during several Fed moves in 2024–25, the rupee swung 1–3% within days, illustrating how quickly currency shifts can affect business costs.

• Cost impact: Even a 1% drop increases local-currency costs of dollar-denominated loans or imported raw materials.

You might be asking yourself: “If the Fed is in the US, why do these changes hit my business so quickly?” The answer lies in globalisation and external funding. 

Indian corporates today rely more on ECBs (External Commercial Borrowing), cross-border lending, and short-term overseas capital, making them highly sensitive to international rate shifts.

Recent market episodes show how fast the impact travels:

• 2022–2024 repricing: Indian 10-year yields rose and fell almost in sync with US yields, reflecting global contagion.

• ECB exposure: Although ECB levels actually fell a trifle in 2024, the level of foreign borrowing is still high — so any Fed-driven shift in the US funding market has an echo here. Businesses holding dollar-denominated loans remain the most exposed, as higher US yields instantly raise servicing costs and refinancing risks.

• Domestic ripple: Companies with no direct foreign exposure still feel it via higher G-sec rates and bank loan rates.

For business executives, the message is plain: segment your liabilities. Get top priority for contingency planning on:

• ECB rollovers

• Short-term commercial paper

• Floating-rate domestic loans

These buckets are most exposed to abrupt rate changes. Acting early helps you insulate cash flow, handle hedges, and prevent reactive funding charges.

How Fed Rate Decisions Affect India’s Monetary and Credit Conditions

When the US Federal Reserve changes its policy rate, it affects India’s interest rates and borrowing costs. Higher US rates can push up government bond yields here, prompting the RBI to adjust its policies, which then influence bank lending rates and business borrowing. Understanding this sequence helps businesses anticipate funding costs and plan accordingly. 

RBI’s Reaction Function

When the Fed tightens abroad, the RBI faces a delicate balancing act. Global yields push Indian markets to react, but domestic inflation and growth fundamentals often demand a different path. In 2022–23, the repo rate jumped to 6.5% by February 2023 to contain imported inflation and defend the rupee, yet in 2024–25, it eased gradually as domestic growth slowed.

Key dynamics to follow:

• The RBI considers US yield pressures but also weighs domestic inflation and economic momentum.

• A stronger dollar raises costs for oil, commodities, and imported capital goods, nudging RBI to pre-emptively tighten.

• If local demand softens, RBI may hold or slow hikes despite global pressure.

"If the Fed is hiking rates, does that mean the RBI will automatically follow?"

Not necessarily. RBI takes into account domestic inflation, growth patterns, and imported cost pressures prior to changing the repo rate. The trick is to watch RBI minutes and MPC statements, these reveal if India will be going along with the global trend or diverging, which, in turn, has an immediate impact on domestic lending rates.

The Rupee and Imported Inflation

Suppose your company imports raw materials and equipment from overseas. When the Fed raises interest rates and the US dollar appreciates, the rupee usually depreciates. Even a 1–2% fall in the INR can push up the local-currency price of imported inputs and USD-denominated debt repayment, compressing margins unwittingly.

• Imported prices go up: Fuel, metal, and other raw materials abruptly cost more in terms of INR.

• Hedging becomes more expensive: Forward contracts and other hedges become more expensive as currency volatility increases.

• Margin pressure: A small rupee move can translate directly into reduced profitability if exposures aren’t actively managed.

In practice, this means you should reprice forward contracts, quantify margin impact per 1% depreciation, and feed these scenarios into your P&L and cash-flow models. By testing different currency outcomes, you can see how imported cost swings might affect earnings and liquidity — and act before costs hit your bottom line.

Credit Conditions Tighten at Home

Rising global rates don’t just stay abroad — they push up the cost of borrowing here at home. In 2024–25, banks’ MCLR levels stayed elevated, reflecting earlier repo hikes, while NBFCs widened credit spreads during periods of global rate spikes. 

The chain is straightforward: 

Fed hikes → higher global risk premium → rising G-sec yields → banks’ wholesale costs climb → MCLR and EBLR increase → domestic loans become more expensive. 

For businesses, this means both short-term and long-term funding comes at a higher cost, and borrowing decisions need to account for this ongoing pressure.

What FY 2025–26 Demands from Business Leaders

1. Build 3-Scenario Capital Plans – Base, high-rate, and low-rate scenarios using historical FPI flows, US 10-year yields, and INR movements. Produce P&L, cash-flow, and balance-sheet projections, mapping WACC sensitivity to US yield shifts, INR depreciation, and G-sec moves. Use these outputs for trigger-based decisions.

2. Prioritize Short-Duration Funding – Avoid long-term lock-ins in volatile yield conditions. Phase non-core capex and refinance long-dated borrowings during favorable spread windows to preserve liquidity and flexibility.

3. Track the Full Yield Curve – Corporate borrowing is priced off G-sec yields and spreads, not just repo. Monitor 1y/3y/5y/10y points and OIS (Overnight Indexed Swap) spreads to optimize debt tenor and issuance timing.

4. Invest in Treasury Analytics & Dynamic WACC Models – Rolling forecasts and dynamic tools reduce risk from volatility. Track FX exposure, funding needs, WACC sensitivity, and hedging costs in real time. Allocate resources to these capabilities, in-house or via virtual treasury/CFO, to make timely, informed financial decisions.

Final Note

As we’ve seen, FY 2025–26 will demand proactive planning, real-time monitoring, and agile decision-making. If your organization doesn’t have a full-time in-house CFO, a Virtual CFO can fill that gap, helping you act quickly on scenario insights, manage funding risks, and optimize your capital structure. CFO BRIDGE specializes in delivering this expertise, guiding businesses through dynamic rate environments and ensuring every financial decision is timely and informed.

To find out how a virtual CFO may assist you in overcoming these obstacles and protecting your company from fluctuations, get in touch with our expert.