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US inflation is on the rise, making a US Fed rate drop in June improbable. What does this imply for investors in India, and what are their best options?

Now that the March CPI data exceeded forecasts, there is little probability that the US Federal Reserve will lower interest rates. The Federal Reserve will maintain its 2% inflation objective and will not quickly lower interest rates, according to recent statements from Fed officials.

According to statistics provided by the Labor Department’s Bureau of Labor Statistics on Wednesday, April 10, the US consumer price index (CPI) increased by 0.4 percent month-over-month (MoM) and 3.5 percent year-over-year (YoY), above the expectations of the Street, which were for MoM and YoY increases of 0.3 and 3.4 percent, respectively.

Core inflation, which the Fed monitors carefully, increased by 0.4% MoM compared to forecast increases of 0.3%. Core inflation increased 3.8% YoY, compared with a 3.7% rise predicted by Wall Street.

The largest increase in six months was seen in the US CPI figures for March (since September 2023).

June Fed rate decrease not coming?
The US inflation report for March was hotter than anticipated, which has severely damaged expectations of a June rate decrease by the Fed.

Experts emphasize that, in contrast to the six rate reductions anticipated at the start of the year and the three rate cuts anticipated in March, US Fed swap markets are discounting the chance of just two rate cuts this year.

“The market was expecting six rate cuts at the start of this year. The current forecast is down to maybe two or three at most. According to V. K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, a rate drop of up to 50 basis points is still feasible this year and would be backloaded.

Furthermore, the US economy is still growing, so the Fed has no need to lower interest rates in June.

According to Reuters, the CME’s FedWatch tool currently shows that there is just a 17% chance that the Fed will lower rates in June.

“Traders now see the likelihood of an interest rate cut at the September meeting, with a 66 percent probability, based on prices of rate futures,” according to Reuters.

The likelihood of a rate reduction in June may have vanished, according to Emkay Global Financial Services’ lead economist, Madhavi Arora.

“Although it seems like the US June cut is over, the Fed could still be inclined to steer toward a reduction this year in order to provide a soft landing. They fear a breakpoint if left unaddressed and are still trying to understand the growth resilience in the face of enormous and very rapid 525bp rate rises, according to Arora.

The US CPI report of 3.5%, according to fund manager Vaibhav Shah of Torus ORO PMS, casts doubt on the Fed’s decision to change course on interest rates in June.

“Sticky inflation has made it less likely that it will meet the US Federal Reserve’s 2 percent objective. Shah said that the Federal Reserve has repeatedly stated that the committee is not in a rush to lower interest rates unless clear indications of deflation become apparent.

What does this signify for investors in India?
The US’s persistent inflation is detrimental to developing economies like India. It lessens the likelihood of rate decreases, which often raise the rates on US bonds and the currency. Foreign money then starts to leave developing economies as a result.

The Indian market is negatively impacted by US inflation, as there is a strong correlation between the two markets. Furthermore, debt investment in the US will be more alluring than debt investment in developing nations, according to G. Chokkalingam, Equinomics Research Private Limited’s founder and head of research.

However, in the near term, a downturn in the Indian stock market can provide a purchasing opportunity.

There is no reason to fear since, as Chokkalingam said, India’s development narrative will unfold in the medium to long term.

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

The medium- to long-term market picture is too good, but there is a bubble in many mid- and small-cap firms, so investors should remain involved but exercise great caution when choosing equities, according to Chokkalingam.

What actions are Indian investors supposed to take?
The market may correct itself if the likelihood of a Fed rate reduction declines, as these expectations were a key factor in the current market surge.

Experts, however, maintain that investors should concentrate more on fundamentals and that the long-term prognosis for the Indian stock market is still favorable. It is advised to wager on subjects that are domestic in nature.

Allocating funds to gold and other inflation-resistant assets is another option available to investors.

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

“Looking forward, in addition to other variables, we see global trends pointing to increased capital expenditure, such as the re-globalization of supply chains, digitization, and the energy shift. Therefore, it’s possible that a stronger inflationary impetus may emerge in the next years. In light of inflation resiliency, some structural asset allocation makes sense, according to Arora

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