Mayuresh Joshimain power, Market blacksmith IndiaIn the Indian context, much of the market expectation or consensus is that there could be a token rate cut, with food inflation expected to decline in the coming months. Therefore, a symbolic interest rate cut in the coming months cannot be ruled out. February. Beyond the rate cuts, the point of contention will be how earnings will develop and how geopolitics will evolve in the coming weeks.
Although the Fed has cut rates by 25 basis points, it is the commentary that has spooked the market. Next year, instead of four, there will now be only two interest rate cuts. The markets reacted negatively, and a major sell-off ensued in global markets. The D-Street also followed suit. How do you read Fed Chairman Jerome Powell’s comments there?
Mayuresh Joshi: So two things. First, in terms of interest rate cut expectations, it was in line with market consensus. But to a large extent, the market consensus also believes that the tone could probably be aggressive, and it has moved in that direction. So you certainly expect a pause in the way the Fed moves in January, and then you probably see a token rate cut that could happen based on the way data points are likely to work. Now it is largely unknown what Trump will do after he resumes office on January 20. Are we going to see a significant number of tariff wars take place? Do we expect that certain elements of the corporate tax cut are likely to happen? Therefore, core inflation, which is very stable at the moment, could be well above the 2% threshold that the Fed likely adopted in its latest dot chart.
So to that extent, the markets may well pick this up over the next few sessions and then look back at how the gains will play out. The whole pivot for the markets will be in how the profits turn out. And if earnings hold steady, I think the markets will respond accordingly.
Similarly, what you’ve probably seen in the Indian context is that a lot of the market’s expectations or consensus is that there could be a token rate cut, with food inflation expected to come down over the next few months and therefore a symbolic interest rate reduction will take place. A cut in February cannot be ruled out. But again, how the world is likely to move, what happens geopolitically, if inflation remains persistent in the Indian context as well, we will have to wait for comments from the RBI on how they adapt to the global cycle and also to the Indian context. So the talking point beyond interest rate cuts will be how the gains play out for global markets and how geopolitics will evolve in the coming weeks.In India, a rate cut is still expected for February, and while domestic macros justify this, do global macros and now of course the Fed’s hawkish stance really make the decision harder? And then what could be the RBI’s rate cut trajectory for the coming year?
Mayuresh Joshi: What former Governor Shaktikanta Das had said consistently is that they will look at data points and how data points are developing. Naturally, our own context is the 4% benchmark that we use as a threshold. Therefore, the expectations in terms of better kharif production that has come into the market, and the expectations of inflationary pressures specifically created by food that is expected to decline, will mean that there will be an element of deferral insofar as it overall inflation dynamics.
That said, a token cut is not out of the question. That is the consensus in February. But after that it will largely depend on how global markets will behave, how the Fed is likely to move, how the European Central Bank is expected to move, how inflation rates around the world will move. In our own context, whether food inflation slowly drops to that 4% mark before the next rate cut cycle really depends on how the data points play out. A symbolic interest rate cut was therefore once again not ruled out. The trajectory depends on the data points the market is likely to follow.
Now the money movement will be in asset classes with higher returns. If interest rates remain high for longer, there could be further money movement from emerging markets. We have already witnessed heavy FII selling in the Indian markets. The dollar index is rising. We see that there are a lot of macroeconomic headwinds coming as far as Indian markets are concerned. What could impact Indian markets in the future? Is it just earnings growth for India?
Mayuresh Joshi: So two things. First, earnings figures obviously remain the base case, not just for the Indian equity markets, but also for the US markets. How earnings will develop will be a defining scenario in terms of forward multiples as far as the markets are concerned. The second element is of course public investment. There are high expectations about what is likely to happen as a result of the election. It was limited to a large extent. Therefore, a significant amount of public investment in the system should come through in the second half of the year.
On February 1, as we enter the new year, the budget will be announced and in my opinion there should be a significant allocation, which is likely to happen in terms of capital expenditure. 11.1 lakh crores last year, that should be increased by at least 10% to 15% as we enter sustaining growth next year.
Let us not forget that Trump has also promised that he will have his own version of aatmanirbhar USA, with a lot of investments expected to come into the US market and self-reliance there too. Therefore, supporting growth through budget support will be of paramount importance.
Obviously the trigger points that the market will look at for external income and public investment is the way in which private capital investment comes back because that is the third leg which is extremely crucial in terms of the overall micro growth that people are talking about in terms of the overall grow. supporting GDP growth. If private capital investment starts to come back slowly and steadily, I believe the domestic economy and the consumption patterns we will see in the coming quarters should hold up.
The flows continue in terms of SIPs as far as equity markets are concerned and even though the FII has probably undergone some element of reset both in terms of global factors and in terms of the US 10-year yield which has reached 4.4 , which is clearly a large part of the risk premium they have against emerging economies. There will be some depreciation of the rupee as we have to be extremely competitive with other players including countries like Thailand and Vietnam, and let’s not forget China when it comes to our exports, no matter what tariffs are imposed.
Therefore, all these three factors together will have a huge impact on the market. So there are plenty of triggers for the market to deal with, but the base case remains, as I said, how earnings will develop if the markets have to maintain their high valuations.
