Is the US Headed Toward Stagflation? Fed’s Forecasts Hint at Trouble—Here’s What It Means for Indian Markets

US Fed flags rising inflation and slower growth amid Trump’s tariff shock; India may stay resilient, but FPI flows and liquidity face risk.

Washington | New Delhi | June 19, 2025 — The US Federal Reserve has kept its benchmark interest rate unchanged at 4.25%–4.50%, citing growing concerns over President Donald Trump’s renewed tariff war and the resulting economic uncertainty.

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While holding rates steady for a fourth consecutive time, the Fed trimmed its 2025 GDP growth forecast to 1.4% (down from 1.7% in March), projected unemployment to rise to 4.5%, and revised inflation upward to 3% — signaling a troubling macroeconomic mix reminiscent of stagflation.

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🔍 Is the US Entering Stagflation?

Though the US economy showed resilience in early 2025, inflationary risks have returned. May’s CPI data surprised positively at 2.8% YoY, aided by pre-tariff consumer spending, but Fed Chair Jerome Powell warned that the full impact of tariffs on consumer prices would be visible by mid-summer.

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“The Fed is concerned that the fog of uncertainty due to tariff-led disruptions will cloud upcoming data, making it difficult to chart a clear path for monetary easing,” said K. Joseph Thomas of Emkay Global Financial Services.

While Powell stopped short of using the term “stagflation,” experts believe the combination of rising prices, slowing growth, and stagnant employment raises stagflation red flags, even if the condition is not fully entrenched yet.

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📉 Impact on Indian Stock Market and RBI Policy

India, largely driven by domestic demand, is not immediately vulnerable to a US economic slowdown. However, the indirect effects could be significant:

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• FPI Flows: A risk-off global mood and dollar volatility could lead to FPI outflows, especially from emerging markets like India.
• Interest Rate Trends: If the Fed stays hawkish, global central banks, including the RBI, may delay rate cuts, tightening liquidity.
• Rupee Volatility: A stronger US dollar could pressure the Indian rupee, impacting imports and trade balances.

“While US-centric developments may not derail India’s growth trajectory, they do have short-term implications on capital flows and exchange rate volatility,” said Thomas.

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🏛️ RBI Likely to Stay Cautious

With the Fed signaling no near-term rate cuts, the Reserve Bank of India (RBI) is expected to retain its neutral stance, having already shifted away from accommodation earlier this year.

The prospect of delayed rate cuts globally may tighten global liquidity, challenging emerging markets’ valuations and growth capital access.

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🌍 Global Implications

• Dollar Index: May see temporary strength, reversing recent weakening trends.
• Commodity Prices: Uncertainty may push investors towards safe-haven assets like gold; oil markets also watch US growth trends closely.
• Equity Sentiment: Indian markets may face near-term corrections, but strong fundamentals are likely to support medium-term uptrend.

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📌 Conclusion

While the US Fed’s cautious tone and economic projections do not confirm stagflation outright, they signal enough warning signs for markets and policymakers. For India, the road ahead may require macroprudence, exchange rate management, and capital market monitoring to navigate external shocks without losing growth momentum.

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Tags: US Fed Interest Rate, US Stagflation Risk, Affected Indian Stock Market, Jerome Powell, RBI Policy Outlook, Trump Tariffs 2025, Inflation Forecast US, GDP Growth US 2025, Global Markets, Indian Economy

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