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Business News/ Markets / Stock Markets/  US Fed rate cut unlikely in June as US inflation hots up. What this means for Indian investors and what should they do?

US Fed rate cut unlikely in June as US inflation hots up. What this means for Indian investors and what should they do?

With March CPI prints above expectations, chances of a US Federal Reserve rate cut are low. Fed officials stick to 2 per cent inflation target, won't rush on rate cuts.

With the US economy remaining strong, the Fed has no compulsion to cut rates in June. (Photo by SAUL LOEB / AFP) (AFP)Premium
With the US economy remaining strong, the Fed has no compulsion to cut rates in June. (Photo by SAUL LOEB / AFP) (AFP)

With the March CPI prints coming above expectations, chances of a rate cut by the US Federal Reserve are dismal now. The Fed officials have reiterated in the recent past that the central bank will stick to its inflation target of 2 per cent and would not haste on cutting rates.

The US consumer price index (CPI) rose 0.4 per cent month-on-month (MoM) and 3.5 per cent year-on-year (YoY), above the Street expectations of 0.3 per cent MoM and 3.4 per cent YoY, according to data released by the Labor Department's Bureau of Labor Statistics on Wednesday, April 10.

Core inflation, which the Fed tracks closely, grew 0.4 per cent MoM against the expectations of a 0.3 per cent increase. On a YoY basis, core inflation grew 3.8 per cent while Street expected an increase of 3.7 per cent.

Also Read: US inflation beats Wall Street estimates, rises 0.4% in March; Fed's June rate cut hopes fade away

The US CPI data for March marked the biggest gain in six months (since September 2023). 

Also Read: Fed rate cuts are now a matter of if, not just when

No Fed rate cut in June?

The hotter-than-expected US inflation print for March has dealt a serious blow to hopes of Fed rate cuts in June. 

Experts underscore that US Fed swap markets are discounting the possibility of only two rate cuts this year, compared to the six rate cuts expected at the beginning of the year and three rate cut expectations in March.

"This year began with market expectation of six rate cuts. Now the expectation has come down to a maximum of three, perhaps two. Even now a total of 50bp rate cut is possible this year and these will be backloaded," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Moreover, with the US economy remaining strong, the Fed has no compulsion to cut rates in June.

As Reuters reported, the CME's FedWatch tool now indicates the expectations of Fed rate cuts in June have declined to 17 per cent.

"Traders now see the likelihood of an interest rate cut at the September meeting, with a 66 per cent probability, based on prices of rate futures," Reuters reported.

Also Read: US Fed minutes reveal slice in treasury securities from the balance sheet runoff

As per Madhavi Arora, Lead Economist at Emkay Global Financial Services, the chances of a rate cut in June may be gone now.

"The US June cut looks to be a shut case, but the Fed may still be motivated to guide towards cuts this year to engineer a soft landing. They are also still trying to fathom the growth resilience despite massive and super quick 525bp rate hikes and fearing a breakpoint if left untreated," Arora said.

Vaibhav Shah, a fund manager at Torus ORO PMS said the US CPI print at 3.5 per cent raises some doubts about the Fed pivot on interest rate in June policy.

"Inflation has shown signs of stickiness leading to a lower possibility of it reaching the US Fed target of 2 per cent. The Fed has reiterated on multiple occasions that the committee is in no hurry to cut rates till concrete disinflation signs are visible," said Shah.

What does this mean for Indian investors?

Sticky inflation in the US is bad news for emerging markets like India. It reduces the chances of rate cuts, which would normally boost the dollar and US bond yields. This, in turn, triggers foreign capital to flow out of emerging economies.

"Inflation not coming down in the US is negative for the Indian market because the Indian market is highly correlated to the US market. Besides, debt investment in the US will be more attractive in the US than debt investment in emerging markets," said G. Chokkalingam, Founder and Head of Research at Equinomics Research Private Limited.

But if the Indian stock market sees a correction in the short term, it could be a buying opportunity.

As Chokkalingam observed, in the medium to long term, India's growth story will play out so there is no need to panic.

"The economic growth story, political stability and massive inflow of retail investors are the three major structural changes which augur well for medium to long-term investments," said Chokkalingam.

“Investors should stay invested but be extremely cautious in stock selection because, on the one hand, the medium to long-term outlook for the market looks too impressive, on the other hand, there is a bubble in many mid and small-cap stocks," said Chokkalingam.

What should Indian investors do?

The diminishing prospects of Fed rate cuts can trigger some correction in the market as the rate cut expectations have been among the major drivers of the recent market rally.

However, experts believe the long-term outlook for the India stock market remains bright and investors should focus more on fundamentals. They recommend betting on domestic-centric themes.

Also Read: Will India overtake China to become world's economic heavyweight by 2028?

Investors can also consider asset allocation to inflation-resilient assets such as gold.

Arora expects cyclical and inflation-aware asset classes, including energy, productive metals, precious metals and industrials, to outperform.

"Going ahead, apart from other factors, we see global trends, including supply chain re-globalisation, digitisation, and the energy transition to point to high capital investment. Thus, a higher inflationary impulse in the coming years may not be ruled out. To that extent, some structural asset allocation to inflation resilience makes sense," said Arora.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 11 Apr 2024, 11:04 AM IST
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