New Delhi [India], December 25 : The policy measures of US President-elect Donald Trump could pose challenges to the Reserve Bank of India's (RBI) plans for monetary policy easing, stated a report by Standard Chartered Bank.
The report noted that the uncertainty around Trump's policies, combined with inflationary pressures, might affect the timing of interest rate cuts by the RBI.
It said, "Trump's policy could pose a hinderance to the timing of RBI's policy easing".
According to the report, while domestic inflation is expected to ease, the volatility in food prices and the potential inflationary impact of Trump's policies could delay it. Inflationary pressures also have broader implications for the financial markets.
The report noted that higher inflation can lead to a stronger correlation between stock and bond performance, as seen in 2022 when a rapid rise in inflation and interest rates negatively impacted both asset classes.
This situation could reduce the effectiveness of bonds as a safeguard against market volatility, prompting investors to consider alternative strategies.
"In this scenario, a resurgence in inflation could push stock-bond correlation higher, reducing the effectiveness of bonds as a buffer against volatility in risk assets," the report said.
The report suggested that real assets, cash, and gold could serve as effective hedges against inflation. Additionally, defensive sectors like consumer staples and high-quality stocks could provide stability during inflationary periods.
Despite these challenges, the RBI is expected to initiate a rate-cutting cycle in 2025, potentially reducing rates by 50-75 basis points as inflation moves closer to its medium-term target of 4 per cent. However, the pace of rate cuts may be restrained by persistently high inflation and a cyclical uptick 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 alike will need to carefully navigate these challenges to balance growth and stability in the economy.
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