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Policy pivot is the talk of the town again even though central bankers are loath to fuel the early hour party banter surrounding rate cuts and economic landings. But central bankers cannot ignore data, especially when they have always been in the club of data-dependent intelligentsia.

So, when US consumer price inflation slipped below 3 percent in July and excluding shelter inflation, price levels undershot market expectations, it bolstered the calls for a rate cut by the US Federal Reserve as early as next month. In fact, a section of the market wants the cut to be a deep 50 basis points to avoid a hard landing. Fed Chair Jay Powell is already open to a September cut, if one listened to his remarks after the policy meet this month. The prospect of Powell laying out a clearer map to rate cuts at Jackson Hole next week is what the market is hoping for.
But before that, investors will continue to navigate the treacherous routes of economic landing expectations. Every US data point is making investors swing from hard landing to soft landing and everywhere in the middle. While the jobs data did not do much to quell hard landing fears, the retail sales data this month seems to suggest that all is well for the US citizen’s spending power and so the economy would achieve a soft landing, no thanks to the Fed’s stubbornness with rates.

Underneath this constant chatter is a feeling that the US is already in recession. Analysts are working overtime to be right on this. As Soumaya Keynes tells us in this FT piece, free to read for Moneycontrol subscribers, “The fundamental challenge here is that there have been nine recessions since 1960, not enough to identify patterns that would definitely hold in a freakish post-pandemic period.” Long story short, it is futile to figure out recession.
But why should we, 8000 miles and 100 basis points away from the US, bother about whether its economy has a crash landing or smooth touchdown?

Despite the Reserve Bank of India Governor Shaktikanta Das’s premise that Fed policy need not dictate ours, the central banker is stuck with the truth that the largest global economy is also our biggest capital supplier. Since hell hath no fury like an investor scorned, we do not want to fight the Fed when the lion’s share of foreign capital flows is from American shores. Add the fact that bulk of our export earnings are tied to the US consumer, and we have no elbow room to nudge away from them. This means we cannot ignore a Fed rate cut -- this is behind the growing expectation that the RBI would snip at the repo rate as early as October -- when it happens. At the same time, we can’t afford to outrun the Fed and cut before them, since our inflation story is different.

Ananya Roy explains lucidly how central bankers in both countries have been waiting and watching their inflation trajectory. While Keynes advises investors to “live with some uncertainty”, Roy explains why a pivot won’t be enough to liven up the Indian equity market rally.

The Fed’s policy and the RBI’s counter to domestic inflation determine how firms draw up, scratch, and redraw their investment plans. Predicting the Fed is easier than arriving at what the Indian monetary policy committee might do. Why? The current MPC composition is set for a dramatic change over the next four months. The three external members will see the end of their four-year tenure and exit in October to be replaced by a new set. Thereafter, Das and his deputy Michael Patra are set to hang up their work boots too in December and January, respectively.

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How would a new MPC vote? In fact, what would a new governor have in store? These are questions that would weigh heavily on the markets when a season of festivities will begin. The second half of a fiscal year, especially the third quarter, is when India gets high on consumption and gives its producers reason to crank up their factories. That yearly sugar high must not distract from the fact that India’s listed firms reported a net profit growth of just 3 percent for April-June. Ruchir Sharma, famed for his critically acclaimed book Breakout Nations, is baffled by the Indian equity market valuations. “There really has been no bull market in the world this decade like India.”

This exuberance has begun to scare everyone now. Kotak Institutional Equities warns yet again that there is no corner of the Indian equity market that offers a fair value. The faith of the retail investor has upended arguments on fundamentals and disconnected valuations from earnings. In their report aptly titled Faith, froth and fundamentals, Kotak analysts warn about this unshakeable faith of retail investors on high returns at all price points. Are shrinking long-term returns the price we pay for faith?

Lisa Barbora, in her latest column, answers whether long-term equity returns are shrinking, given that valuations seem to defy gravity. While there is no evidence in corporate earnings that equities won’t compound in the long run, investors are best to remember this. When in doubt, get out.

Investing insights from our research team

Weekly Tactical Pick: Why you should sign up for this company

Hero MotoCorp Q1: Deserves a look, thanks to positive rural sentiment

EaseMyTrip Q1 FY25 – Defending profitability at the cost of market share

Apollo Hospitals: Strong Q1 FY25, growth momentum to continue

Ola Electric Q1 FY25: Strong start, but profitability remains elusive

Galaxy Surfactants: Growth led by advanced economies

Senco Gold: Glowing long-term prospects

What else are we reading?

Last mile of disinflation is an unfinished job for near expiry MPC

Indian pharma market sees signs of recovery in July

Chart of the Day: Factors that could tighten liquidity in coming weeks

July export blip betrays lingering trade trouble

Bangladesh crisis, a risk or an opportunity for India’s textile industry?

Simple indicators of whether the US is in recession are flawed (republished from the FT)

Sexual offence against women: Much changed in law, but much remained the same in implementation

Civil-military Disharmony: Lessons from Bangladesh's military challenge to civilian rule

India 2047: A vision of prosperity, equality, and innovation for the brave, new citizen of Viksit Bharat

Bangladesh’s Brouhaha: Political, economic chaos and what the future holds for Dhaka

US market may be too aggressive on Federal rate cuts

Markets

Despite challenges, midcaps and smallcaps improve debt servicing ability in June quarter

Personal Finance

Just 10 stocks: That’s what DSP Mutual Fund’s new fund thinks will win the race. Should you invest? A Moneycontrol review

Tech and Startups

Top 5 Indian IT companies see 5.6% YoY jump in revenue per employee in FY24

Technical Picks: Tata Motors, ICICI Lombard, and Oberoi Realty (These are published every trading day before markets open and can be read on the app).

Aparna IyerMoneycontrol Pro