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Transcript
00:00Will they, won't they?
00:02That's been the biggest question mark in terms of a possible Fed rate cut in all of 2024.
00:10And over the last five months, the timing of that cut has moved from possibly in March
00:16to September to December.
00:19And now with the latest set of economic data coming out of the United States, maybe a slightly
00:23more positive outlook.
00:25But what is the scenario setting up to be right now?
00:28What does it mean for India's FX outlook?
00:31To talk about all of these things and more, I'm joined now by Adarsh Sinha.
00:35He's co-head of Asia FX and rate strategy at Bank of America.
00:40Mr. Sinha, thank you so much for speaking with us here at NDTV Profit.
00:44We're glad that you've taken out the time to talk with us today.
00:47So let me start with your take on where we are.
00:52In the last seven or eight days alone, there has been such a swing in sentiment on both
00:59the outlook for the American economy, as well as the possibility of rate cuts, whether it's
01:06employment data changing, you know, non-farm payroll data changing that mood.
01:10Earlier, it was GDP data changing that mood.
01:14Where is your assessment standing right now?
01:17Sure, Sumana.
01:18Thanks for having me.
01:21So you're right.
01:23Market pricing for the first Fed rate cuts has shifted a lot.
01:26Initially, it was the CTI inflation data a few weeks ago that was higher than expected.
01:31And then more recently on Friday, of course, the jobs data was weaker than expected.
01:36So look, I mean, our view is that the first Fed rate cut happened in December after the
01:41U.S. election.
01:42The market is currently pricing in just under two rate cuts by the end of the year.
01:47So I suspect the market will keep shifting between roughly around one to two rate cuts
01:51for 2024, leading up to important data releases.
01:55And I think the most important data release coming up now after the jobs report is the
01:59next CTI inflation print next week.
02:02So I think the jobs report was important in that it suggested a very important part of
02:07the U.S. economy.
02:08The service sector is slowing down.
02:10And a lot of the things that the Federal Reserve cares about, whether it's the consumer, the
02:14labor market, inflation, all of that is being driven by resilience and services.
02:19And you also had the Iceland services index on Friday that was weaker than expected.
02:23So I think all of this is consistent with our view that the Federal Reserve will definitely
02:28not hike again.
02:29There was some discussion around rate hikes a couple of weeks back.
02:33That won't happen.
02:34And they'll probably cut rates this year.
02:36The reason we've gone with December rather than September is that we think it'll be a
02:40bit difficult for the Federal Reserve to cut rates too close to the U.S. election, as well
02:45as the fact that base effects will become more positive for inflation in the second
02:49half of the year.
02:50So we think they probably need to wait until December to deliver that all-important first
02:55rate cut.
02:56So what do you make, Mr. Sinha, of now polls?
03:00I think the last rating I saw was 66 percent saying there would be two rate cuts this year.
03:05Do you think that's just the optimism index this week and it will pare down depending
03:10on the next set of data?
03:11Yeah.
03:12I mean, as I said, that's pretty much what the market is pricing in, two rate cuts.
03:18But I think that'll swing a lot.
03:19You just need a sticky inflation print next week for the market to move back to pricing
03:23in just one rate cut or maybe less.
03:25So as I said, I think we'll be in this one to two rate cut range.
03:28I think for the market to price in more than two rate cuts is going to be quite difficult
03:33because for that, we need to see meaningful progress on inflation.
03:38And what that means is the Fed needs to be confident that core PC inflation is at two
03:44and a half percent, close to two and a half percent and heading towards that target of
03:47two percent.
03:48And in my opinion, that seems unlikely over the next couple of months at least.
03:52So I think we'll stay in this one to two rate cut range in terms of expectations, in terms
03:56of market pricing.
03:58Just to come back to why you're pencilling in December and what are the factors coming
04:03in, do you see inflation pairing down to where the Fed wants it or do you see a more
04:11clear weakening of economic indicators for the U.S.?
04:15Which one do you think is the penny that will drop?
04:17So I think it's a combination of both.
04:21But I think inflation by its nature is sticky and often a lagging indicator.
04:26And I don't think the Fed needs to wait for inflation to come down to two percent to start
04:29cutting.
04:30And as I said, if inflation, if core inflation, core PC to be precise, comes down to two and
04:34a half percent, I think they'll be comfortable starting rate cuts.
04:38So I suspect what matters more and what is perhaps more of a forward looking indicator
04:42is the actual growth numbers.
04:43And in terms of growth numbers, I would argue it's not even the labor market.
04:47The labor market tends to be a lagging indicator as well.
04:50So I would say it's forward looking indicators like the ISM services, like consumer spending
04:54data, consumer spending data on services.
04:56I think these growth numbers will probably be a bit more important in terms of giving
05:01Fed confidence in terms of their forward looking forecasts on inflation.
05:05Yes, inflation needs to come lower, make no mistake.
05:08But I don't think they need to wait for inflation to get to two percent.
05:13I want to now understand how you see that impacting, say, the Indian rupee.
05:18Are we going to expect, you know, the sort of range of weakness we're seeing rupee dollar
05:25till at least December?
05:27What are the triggers there that you see?
05:29Look, I mean, the FX market tends to be forward looking.
05:35So the dollar is not going to weaken in December when the Fed cuts rates for the first time.
05:40So I think as long as the FX market has confidence that we're not that far away from a rate cut,
05:46then the dollar should start to weaken.
05:49And I suspect and based on our forecast, we kind of think that starts to happen towards
05:53the end of the third quarter and definitely in the fourth quarter, we do expect dollar
05:57depreciation.
05:58Until then, the dollar can remain at a strong level.
06:02But I think the dollar rupee, what's perhaps a bit more important than the direction of
06:07the dollar is obviously the Reserve Bank of India's reaction function.
06:11They have been one of the most active central banks in intervening the FX market on both
06:16sides, both selling dollars and buying dollars and accumulating reserves and importantly,
06:21keeping FX volatility low.
06:23So the question really is, whatever dollar regime you're in, whether it's a strong dollar
06:28or a weak dollar regime, does that change the reaction function of the Reserve Bank
06:32of India?
06:33And our view is probably not.
06:35I think they've done quite well in terms of keeping FX volatility low.
06:40Heading to the election, FX volatility will probably remain low.
06:43And even after the election, we suspect they'll continue to keep volatility low as long as
06:48you don't see a big swing in the US dollar either way.
06:51However, by the end of the year, given that we do expect dollar depreciation, given that
06:55we do expect the euro to be at 1.12 versus the US dollar, I think that's an environment
07:00where they'll tolerate a slightly lower dollar rupee.
07:03So our forecast for the end of the year is 83, which is only slightly below where we
07:07are right now.
07:08You know, just on that particular point about how responsive or reactive the Reserve Bank
07:16of India will be, and that's sort of the ongoing debate and conversation, should or
07:23will the RBI wait for the Fed to act first?
07:27And is there enough of a case for the RBI to start cutting rates before the Fed moves?
07:34Do you have a take on that?
07:35So frankly, it's a question that every central bank is asking.
07:42And it's interesting, even though we changed our Fed call to December, we haven't changed
07:47most of our other central bank calls for cuts, including India.
07:51So we still forecast the Reserve Bank of India to start cutting rates a few months before
07:56the Federal Reserve.
07:57But it's not just India.
07:59It's the European Central Bank, we think, will cut rates in June.
08:03The Bank of Korea will cut rates before the Fed.
08:06So I can go through a whole list of central banks that could potentially cut rates before
08:10the Fed.
08:11And the reason is that disinflationary dynamics are perhaps a bit more evident in countries
08:16outside the US.
08:18And output gaps are wider, growth is somewhat weaker.
08:22So it does kind of make sense that central banks might not have to wait until the Fed
08:27to start cutting rates.
08:28Now, the only exception to that is for countries where currency depreciation becomes a concern.
08:34So if the currency is facing a lot of pressure, and central banks are reluctant to cut rates,
08:40one central bank, Indonesia, actually hiked rates recently.
08:44So the currency can be a bit of a wildcard.
08:46But I think in the case of India, dollar fee has been quite stable, even during the risk
08:51off that we saw in April.
08:53And as long as the currency remains stable, we think the Reserve Bank of India could potentially,
08:59all things are all else unchanged, start cutting rates a few months before the Federal Reserve.
09:03Okay, so you could see rate cuts in India first.
09:07That's the take from Mr. Sinha.
09:08Thank you so much for joining us.
09:10Pleasure to have you on, and hope to speak with you again soon.
09:16Thank you very much for having me.
09:17Glad to be on.

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