India unlikely to see higher fund flows after US rate cut: Chris Wood

The 50 basis point rate cut by the US Federal Reserve is unlikely to lead to higher fund flows to India, said Chris Wood, Global Head of Equity Strategy, Jefferies, adding that there will be flows to markets like Brazil and Southeast Asia, which are heavily geared into the US rates.

“Brazil has very high real rates. So they’ve got much room to cut rates. Indonesia is the most geared in Asia. India is not…. we don’t think the Reserve Bank of India is in any hurry to cut rates aggressively,” Wood who was in the national capital for the Jefferies India Forum 2024, said on Thursday.

While every Asian country, including India, could have cut rates all year based on their own domestic inflationary pressures or lack of them, they have not done so till now as they did not want to risk their currencies before the US Fed started cutting rates, he further said. “Now with this 50 basis point cut the rooms, the way is open for them to start cutting rates,” he said.

Mahesh Nandurkar, Head of Research and Head Strategist, Jefferies India said that the agency expects the US Federal Reserve to cut rates by a total of 200 basis points by June 2025 out of which it has already reduced 50 basis points. They expect the RBI to cut rates by 50 basis points in all, with the first cut in the first quarter of the calendar year 2025 and the second cut in the second quarter.

Meanwhile, commenting on the Indian economy, Nandurkar said that India has now entered a phase of investment driven growth as compared to dominantly consumption driven growth over the last decade. The agency expects India to grow by 6.5% to 7% over the next several years.

When asked about concerns over a possible recession in the US, Wood said that the US economy has been remarkably resilient but “there’s still a risk of a real US downturn”.

“It’s been amazing how resilient the US economy has been given with her significant rise in interest rates. But I also believe the monetary tightening has worked with a very big lag, because they printed so much money in 2020 that there's a huge base effect,” he said.

Wood also underlined the geopolitical situation and the outcome of the US Presidential elections as the biggest risks that could lead to a correction in the markets. “To me, the biggest risk for global markets today, which India would be hit by too, but, but in a correlative fashion, is geopolitics. This has been the biggest risk for markets for at least three months, because we have two geopolitical situations in Russia - Ukraine and in the Middle East, which continue to escalate,” he said, adding that financial markets have not taken this into account for now and the impact will be felt if something happens.

Markets also want to see a decisive political outcome in the US Presidential elections, he said, noting that there is a risk of a divided election or a disputed result. “The markets will really be relieved if that's concluded with a decisive outcome, regardless of which side wins,” he said.

He was also concerned about the sharp decrease in global crude oil prices which recently touched a three year low of $70 per barrel despite the geopolitical tensions. “The interesting point is that oil has being trading at $70 to $90 per barrel trading range for an extended period. We're right now at the bottom of the range despite all the geopolitical news flows. So the interesting question is why is oil so weak,” he said, noting that one part of it probably relates to the slowdown in the Chinese economy.