Ajay Bagga on Fed Rate Cut: Why Powell’s 'Risk Managemen' Stance Could Boost EM Flows but Delay India’s Upside

There was a Fed rate cut as expected. It was 25 bps as expected. Trump nominee to the Fed Board sought a 50 bps cut as expected. The commentary sounded dovish as the Fed pivoted to managing employment from concern over persistent inflation. However, once Fed Chair Powell called it a ‘risk management cut’, markets saw it as a hawkish move. This means the Fed stays on ‘meeting to meeting’ mode. The rate cut is not due to economic weakness but due to managing the risk of the US jobs market falling off a cliff. The Fed’s concern at yesterday’s meeting can be summed up in three priorities : Jobs , Jobs and Jobs .

Impact on markets? Markets had run up on expectations of the rate cut and two more cuts in 2025 coming up. The Fed delivered on that . What did not go well was the Fed SEP or Dot Plot which showed just 1 cut in 2026 and 1 cut in 2027 . Tariffs have still not impacted the US inflation levels as a lot of goods were front loaded into inventories at the start of the year . Goods inflation is expected to go up as the tariff impact flows through.  How much of that will be contained by a soft jobs market that will lead to softer consumption and low wage inflation, is the key question.

EMs will see enhanced flows as the dollar softens on the rate cuts and the rate cutting outlook. India will have to wait for an earnings recovery by the last quarter of CY2025 to see these flows turning positive for India as well

We expect FPI flows to turn positive in the next three months or with the fresh allocations of the new year in January

Indian markets are pointing to some strength at the open .

Also Read: Strong PMI, GST Cuts and Macro Tailwinds Could Drive Indian Markets to Record Highs Before Diwali: Ajay Bagga