At a recent media roundtable conference on September 6, 2024, in New Delhi, Mahendra Kumar Jajoo, the chief investment officer of fixed assets at Mirae Asset Mutual Fund, said that the US Federal Reserve will cut rates by 100 basis points (bps) by March 2025, while the Reserve Bank of India (RBI) may cut a maximum of 50 bps because of narrower room for cuts.
Fund managers from Mirae Asset Mutual Fund also shared valuable insights into the current economic scenario affecting the equity and debt landscape, tenure of instruments likely to benefit from US Fed rate cuts, and more.
Expectations In Fixed Income Market
Jajoo said that the debate among analysts now revolved around whether the Federal Reserve would opt for a 25 bps cut or a more aggressive 50 bps cut starting September 2024. He said this decision will likely be influenced by the performance of US payroll data, which came out on September 5.
“If US payroll data exceeds expectations, there may be a 25 bps rate increase. If the numbers are poor, there may be a 50 bps rate cut. However, I don’t think the central bank’s decision is solely based on one set of data. I believe the stage has been set for the rate cut,” Jajoo added.
Jajoo also highlighted the substantial decline in US inflation from 9 per cent in 2022 to its current 3 per cent, underscoring the potential for a significant rate cut.
“There’s no clear driver or factor that we foresee will push inflation higher. With the Fed rate at 5.5 per cent and inflation at 3 per cent, I believe it’s an obvious decision. Personally, I think the Fed will reduce rates by at least 100 bps between now and March 2025. Overall, I anticipate they will make adjustments in the range of 50-300 bps. That’s because I am assuming the inflation to be somewhere in the 2.5-3 per cent band in the US,” Jajoo added.
“With the slowing economy and rising unemployment, if you take the real rate to be somewhere around 50 bps, you are looking at about 250 bps of rate cuts. I think the US Fed is in a very commanding position. They will cut 25 basis points for the next three meetings,” he said.
Impact Of US Rate Cuts On Global Markets
Jajoo also hinted at the impact of rate cuts on global markets.
“Theoretically, when the market starts seeing the cause for the reasons for a rate cut, they start taking the longer term rates down. The yield curve becoming flat in the US again indicates that the market is 100 per cent confident that the Fed is going to cut rates. I feel that as and when the Fed keeps cutting rates, the yield curve will become positively sloped again. Most of the action will be on the shorter end in the US or in global markets.”
Incidentally, in 2023, while the US inflation was 6 per cent, the inflation in India was 5 per cent. In 2024, the US inflation was 3 per cent, while in India it was still 5 per cent, Jajoo said, adding that by staying on course for the last 18 months, the RBI has spared us the disruption that would have caused by 10 years of going to 9 per cent and then coming back to 7 per cent.
Jajoo further said that with the current spread between the US Federal Reserve’s rate and India’s repo rate at approximately 100 bps, there is little room for RBI to cut rates. He said he was expecting a more conservative rate cut of 50 bps by RBI due to the global trend of softer rates.
“When the global direction is going for softer rates, I don’t think India can completely isolate itself. But our fundamentals are much stronger today than the US,” he added.
We are still a country with a reasonably high current account deficit, and we are heavily dependent on the monsoon and commodity prices. Therefore, I think that the RBI will be very cautious, he further said.
Additionally, Jajoo highlighted the unique dynamics in India’s corporate bond market. He said if one were to look at the corporate bond market, then corporate bond income is inverted. For instance, three-year corporate bonds are trading at 7.8 per cent, and five-year corporate bonds are at 7.5 per cent. So, for the first time, there is a real inversion of the corporate borrowing curve in India. The corporate bond spreads are trading above the long term average, he said.
“So, now if you look at this big picture, visualise in your mind that when RBI begins to turn accommodative, they will have very little room to cut rates. But they will have lot of capacity to inject liquidity and keep the money markets overflowing of liquidity, which means that this aberration in the corporate world curve and consequent inversion of the income will be reverted. Which means your biggest opportunity today in the fixed income market is in the three to five years. That is the sweet spot, according to me,” he further said.
Therefore, I believe that today, categories like the short duration and low duration categories are likely to benefit from this situation, he added.
Equity Market Outlook
Nilesh Surana, chief investment officer at Mirae Asset Mutual Fund, expressed optimism regarding the robustness of corporate and bank balance sheets. He also appreciated the government’s fiscally conservative approach. Surana projected a promising trajectory for India’s real GDP growth driven by favourable macroeconomic conditions, a significant workforce influx, and a strong manufacturing sector.
On the markets, he said, most pockets are reasonably valued, except for a few. But these are only certain segments, but while they aren’t large, they happen to be more in terms of numbers.
“Second, for investment, the time frame should be higher because it has done so well in the last three, four years, particularly the last eight years just after Covid-19. And because it is not so cheap or there’s no large correction since last 18 months, the go-to category should have enough dosage of small and mid because of choice of businesses,” he added.
