Trump's Policies Could Hamper RBI's Rate-Cut Plans: Standard Chartered

A report by Standard Chartered Bank states that US President-elect Donald Trump's policy measures could pose a challenge to the Reserve Bank of India's (RBI) plans to ease monetary policy.

The report said that the uncertainty around Trump's policies, coupled with inflationary pressures, could affect the timing of interest rate cuts by the RBI.

While domestic inflation is expected to ease, it may be delayed by volatility in food prices and the potential inflationary impact of Trump's policies. Inflationary pressures also have a massive impact on financial markets.

The report noted that higher inflation could lead to a strong correlation between stock and bond performance, as seen in 2022, when a sharp rise in inflation and interest rates negatively impacted both asset classes.

This situation can reduce the effectiveness of bonds as a safeguard against market volatility, causing investors to consider alternative strategies.

In this circumstance, a resurgence in inflation could increase stock-bond correlation, reducing the effectiveness of bonds as a buffer against volatility in riskier assets.

The report suggested that real assets, cash and gold can act as effective hedges against inflation.

Additionally, defensive sectors such as consumer staples and high-quality stocks can provide stability during periods of inflation.

Despite these challenges, the RBI is expected to begin a rate-cutting cycle in 2025, potentially reducing rates by 50-75 basis points as inflation approaches its medium-term target of 4 per cent.

However, the pace of rate cuts could be hampered by persistently high inflation and cyclical buoyancy in economic growth. The report highlights the complexity of the current economic environment, where global and domestic factors interplay to influence monetary policy decisions.

Investors and policymakers will have to carefully address these challenges to balance growth and stability in the economy.