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Amid the dramatic victory of Donald Trump in the presidential elections, it was business-as-usual for the US Federal Reserve (Fed). Chairman Jerome Powell announced the widely expected 25 basis points (bps) rate cut yesterday, stating that the rate-setting committee’s decision was purely data driven. Inflation is easing, the average hourly earnings gains have outpaced inflation for 17 months as of September (Bureau of Labor Statistics), unemployment is low, the economy is growing and a soft-landing is likely.
This seems to be the mood across other central banks, across developed economies at least. The European Central Bank cut rates by 25 bps and so did the Bank of England, also by 25 bps. Further, these banks delivered back-to-back rate cuts in the past couple of meetings, reflecting their confidence in reining in inflation.
However, while the rate cuts delivered thus far are in-line with forecasts, there are undercurrents of worries following Trump’s triumph. If Trump acts on most of his election promises -- as he did in his earlier term -- it would mean more tax breaks within the US, stiff trade barriers to stave off imports and higher spends that could raise the fiscal deficit, along with action against immigration, which could all pose risks to inflation. “The US Fed’s preparedness would depend upon the timing of such announcements and its lagged effect on inflation. As of now, Powell has said he has increased confidence on existing inflation dynamics,” says Anubhav Sahu, in this article Fed vs Trumponomics.
Until and unless Trump’s policies are clearly spelt out, Powell could continue to sing the tune of falling inflation and steady growth and avoid sharing any further guidance based on the economic uncertainties ahead, as this FT analysis (free to read for Pro subscribers) shows. Yet, the market consensus is the rise in the 10-year Treasury yield is down to “Trumpflation”.
Likewise, European policymakers are jittery too as any sort of trade war between the US and Europe sparked off by trade barriers and tariffs could be detrimental to the European economy, which is already seeing a slowdown, high energy costs, and unemployment.
That brings us to the Reserve Bank of India (RBI). After holding steady and not cutting rates in its previous (October) meet, will it follow in the footsteps of its peers in the coming December meet? Speaking at a recent event, RBI Governor Shaktikanta Das stated that a rate cut would be considered once inflation is sustainably closer to the RBI’s 4 percent target. Indeed, while the country’s gross domestic product (GDP) growth is stable, Das expects October inflation numbers to exceed September’s 5.5 percent, which is way above the target.
So, for the RBI, it appears to be more of domestic issues to consider. Food inflation is sticky, and the impact of the extended monsoon on crops and prices is yet to pan out.
The silver lining is that India may gain from the China-plus-one theme during Trump’s tenure, due to tariff differentials. Will this help growth in some manufacturing sectors and fuel investments into India? But that's a separate topic for discussion on India's growth prospects in the global context.
The Trump era could change America’s positioning on oil, which will determine global oil prices and this, in turn, is critical to India’s inflation print.
But going by the caution seen in RBI’s stance in the past, it is unlikely that it would act in haste to toe the line of other central banks in cutting rates.
Investing insights from our research team
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M&M Q2 FY25: Decent quarter, valuation at fair level
Tata Steel: Lower realisation hurts, challenges to persist
Trent Q2 has multiple growth levers
Blue Star Q2: Maintaining robust momentum in challenging times
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Markets
India's renewable majors could face the chill as Trump reiterates anti-clean energy stance
Tech and Startups
Technical Picks: SBI, ZENSARTECH, NH, Tata Steel.
Vatsala Kamat
Moneycontrol Pro
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