The cut could happen in December or be deferred to the first quarter of next year.
While there may be more cuts in 2026, he believes rates will exceed market expectations over the next year.
India, however, stands apart from many emerging markets due to its relatively self-reliant economy and robust external buffers.
While the rupee may see some depreciation against the dollar, it is expected to outperform its emerging market peers, with the Reserve Bank of India likely ensuring a measured and stable transition.
This is the edited excerpt of the interview.
Q: We saw the dollar index at 107.5 on November 22 but after the announcement of the appointment of Scott Bessent, we have seen dollar give up a bit. Can we say dollar has peaked for now?
A: Let us look at the big picture. The mix of policy which the incoming administration in the US will likely adopt…and since then, the cast of characters which has been chosen, validates the argument that this policy mix is going to move towards something which will widen out the gap between US and the rest of the world on multiple fronts.
It will have a much larger positive growth shock in the US. Potentially much tighter monetary conditions because the best part of the disinflation in the US is potentially over, or at least stalled for now, which will prevent the Fed from being able to necessarily cut rates as much as is in the price or was being earlier expected.
And you could argue even in terms of political cycles, with the US having gone past its event risk, while a lot of the rest of the world is still dealing with political fragilities on all these fronts I think the gap between US and the rest of the world will widen and that should reflect itself in a stronger dollar. So, don’t think a Trump 2.0 is in the price on the dollar as yet.
Read Here | Fed Minutes show officials prefer future rate cuts to be gradual
Q: What is your own estimate of how the US 10-year bond yield trajectory can be? It went to 4.50% and came back to 4.2%. Does the higher yield still remain and what is your estimate of the Fed’s rate actions here on December and thereafter?
A: We have one rate cut priced in. Either it will happen in December or maybe it gets pushed out to the first quarter. We are looking at the Fed pausing at about 25 basis points from here, and staying at that point at least through all of 2025.
We could get into a condition where the Fed then resumes this in 2026 and is able to cut rates more. But for the next 12 months, we are projecting only one more rate cut, and therefore potentially an environment for the next 12 months on rates which is a lot higher than what the markets pricing it on the Fed.
Combined with the fact that a mix of policies which is more expansionary on fiscal potentially more inflationary as far as immigration or tariffs is concerned, I still think the combination of that positive demand shock and negative supply shock would combine for a higher term premium in the US and for rates in our opinion and 10-year US yields potentially peaking out closer to 4.75%.
Read Here | US Fed needs to halt rate cuts to sustain strong dollar, says Ed Yardeni
Q: If this is the ecosystem in which the Reserve Bank is operating, that dollar is likely to be stronger and yields are likely to be higher in the US, they are going to continue to keep fund outflows or pressure on the rupee as their base case. What happens to rate cuts in India in that case?
A: India is different from a lot of other countries, especially in the emerging markets. The Indian economy, and therefore the central bank, as an extension, has more degrees of freedom. It’s a much more domestically orientated economy. It depends a lot less on offshore capital flows than to typically, most emerging markets. Its current account while we suspect the gap could widen out a little bit next year, but is very largely under control. The net balance of payments deficit can be well controlled. There are adequate reserves, adequate measures, which the central bank has to control the market.
Can it be completely insulated from the trend globally? Possibly not, if we see dollar to be stronger and rates to be higher. But I would still say the rupee will outperform a lot of other emerging market currencies. It would probably weaken versus the dollar, but the central bank would guide that in a much more calibrated fashion. Will the rupee be weaker versus the dollar in the next 12 months ? It would be. That’s what our global framework tells us, but by a lot less amount than what it probably will be in other EM currencies.
For full interview, watch accompanying video
Also Read | Morgan Stanley projects India GDP growth at 6.5% for FY26; no rate cuts before April 2025
