Fed likely to deliver 2-3 rate cuts in 2025, but with pauses: Invasset's Anirudh Garg

Anirudh Garg, Managing Partner at Invasset

Anirudh Garg, Managing Partner at Invasset, firmly believes in the old market adage, "The Fed is always right." As US Federal Reserve Chair Jerome Powell prepares to announce the central bank's policy decision and forecasts for the coming year on December 18, Garg’s focus is squarely on the implications of Powell's statements.

While Garg, like many on the Street, foresees a potential slowdown in the Fed's rate-cut trajectory in 2025, he remains more concerned about the lingering threat of sticky inflation in the US.

Discussing the implications of the Fed's policy stance on India, Garg pointed to another emerging challenge for the Reserve Bank of India (RBI): the strengthening dollar index.

In an exclusive interview with Moneycontrol, Garg delved into the broader effects of persistent inflation, the return of Trump and his pro-America economic policies, and how these dynamics could shape the rate-cut trajectories of both the Fed and RBI. Below are the edited excerpts from the conversation:

Since we are talking about the Fed's stance and inflation, I would like to stress something that we at Invaset follow closely. There's an old saying in the market: "The Fed is always right." Many people take a contrarian approach to what the Fed says, but to really understand, you need to focus on what the Fed Chair implies directly and that's what I'll follow. I’ve seen this repeatedly over my 17-year career. For example, in 2021, when the Fed Chair highlighted inflation concerns, people didn’t take it seriously, but it impacted sectors like steel over the next five years.

Recently, the Fed Chairman mentioned that we are moving toward the 2 percent zone and are getting more comfortable with it by the day. However, there is skepticism about what might happen when the Trump administration comes in. I believe one has to pay close attention to what the Fed Chairman is saying, as that is where we draw our conclusions.

We believe that rate cuts will happen—but we expect around two to three rate cuts next year. We also believe the pace of cuts might slow down based on the Fed Chairman's statement that they are closely monitoring the situation. A senior fund manager once likened inflation to cancer, saying that it requires periodic "chemos" to manage it and that taking one's eyes off it too soon can lead to dire consequences.

I think we are currently in a stage where US inflation is under control, but the Fed Chairman implied that they cannot afford, under any circumstances, to let it spiral out of control.

A lot will depend on one key factor: the policies of the Trump administration and how expansionary they turn out to be. If tariffs are imposed, they could indeed lead to a slowdown in global growth, creating a need for rate cuts. That said, if inflation persists, those rate cuts may not materialise.

Also, instead of the timing of the rate cuts, one should focus on the broader direction. It’s evident that we are no longer discussing inflationary pressures as intensely as we were six months ago. The key question now revolves around two factors: inflation and growth. From an inflationary perspective, pressures have eased, shifting the entire focus onto global growth. With Trump’s election win and right-wing policies gaining traction in the world’s largest economy and biggest consumer market, much will depend on the nature of these policies. While it’s challenging to predict the specifics, the discussion should move beyond just the timing of rate cuts to understanding the underlying reasons that might necessitate them.

India doesn’t have a major inflation problem except for food inflation. Globally, US inflation affects everyone because of the dollar’s dominance. Ideally, RBI should have cut rates alongside the Fed, but it hasn’t. This signals that there are underlying issues in the Indian economy that aren’t yet visible.

Also Read | Why there might be fewer Fed rate cuts in 2025?

Another concern is the US dollar's strength. The dollar recently touched 85, which is worrying. If the dollar continues rising, the RBI is unlikely to cut rates soon. In my experience, whenever the dollar strengthens significantly, Indian policymakers take a back seat and delay rate decisions.

De-dollarisation is far from reality. The world remains heavily dependent on the US dollar. If Trump comes back, his policies will be pro-US, leading to economic activity and attracting capital back to the US. Given this shift, the US dollar is expected to continue its upward trajectory. Our immediate target for the dollar index stands at around 87 to 87.5. On average, the dollar appreciates 3.5 percent to 4 percent annually relative to the rupee due to interest rate differentials.

Indian markets appear expensive on a price-to-earnings growth (PEG) ratio compared to global peers. While I’m bullish on Indian markets for the next 2-3 years, the near term could see a pause or breather.

The biggest immediate risk is for Indian equities is the uncertainty around Trump’s policies. However, India is now a large, resilient economy with stable governance. Our past policies have been effective, and we expect this trend to continue. That said, valuations remain stretched, and Indian markets might need to cool off.

In the short-term, markets may not deliver superior returns. Investors should focus on selective opportunities and remain cautious. The upcoming budget might introduce populist measures, which could impact capex plans and increase volatility. Overall, the next couple of months could be challenging, but long-term prospects remain positive.

Also Read | Fed rate cut almost a certainty this week, but next year is a different story