So much is happening on both the global as well as domestic front. First, let us talk about things back home. Where is this likely overhaul of GST rates, coupled with the support from other measures from the government, including personal income tax cuts and rate cuts by the RBI, headed into? What is your estimated GDP projection?
Chetan Ahya: The cumulative policy measures which the government has taken alongside, first, we got the income tax cuts and before that, we had the capital expenditure growing from the central government side and state government side and then we got the RBI rate cuts and now finally the GST cuts. All of these measures in total would support domestic demand meaningfully. There is obviously some lag in all of these measures to come through to growth numbers, but we think that from the third quarter of this year, probably towards September-October, we should see clear signs of domestic demand recovery.
If you think of it, out of all the factors, the most important one was the RBI’s policy rate cuts. Usually in three-four months’ time after the policy rate cuts, it transmits to lending rates and there is another three-four months lag from that point of time which would imply that September-October would be the time when you should see meaningful support to growth coming in from that monetary policy with the lag. So yes, all these factors should support domestic demand recovery.
However, we do have a slowdown in growth but that is primarily because of the trade slowdown. It is likely that when trade slows, there will be some negative implications on the private investment side and so therefore, we are expecting growth to slow around 6% by quarter ended December and then begin to recover from first quarter of 2026, i.e., quarter ended March 2026 because by that time you would have seen more transmission of the policy easing that the government has taken up and the RBI has taken up and at the same time we think that by that time you will also see some reduced negative effect from this global trade slowdown.
What would be the inflationary impact should the tariffs come by and, of course, GST rationalisation?
Chetan Ahya: For India, the challenge will be low inflation. We have already seen that core inflation is below 4% and if you look at WPI which is equal to PPI everywhere else in the world, that has also been quite weak. So, yes, in some ways, there will be reduced inflation. But this reduction in inflation because of GST should be seen more as a positive source of disinflation rather than something that should be seen as negative. The deflationary pressure that we saw because of China’s deflation and global trade slowdown, that is what we would call it as negative. But the one which we are going to see because of GST rate cuts should be seen as a positive support to the economy.
Does that leave the RBI then? Are you anticipating further easing or will the status quo remain for the rest of the year?
Chetan Ahya: We think RBI will cut rates again in the October policy meeting and we are also highlighting the risk that if the disinflationary pressures from the rest of the world intensifies, then RBI will have scope to do one more rate cut in addition to the one that they will do in October.
That is your expectation from the RBI. But what about the Fed because there is so much pressure building in from Trump on the Fed chair in hopes of getting a rate cut. Do you think that could be possible in the September meeting?
Chetan Ahya: Our house view is that there will not be a rate cut in September, but it is very much predicated on the next jobs print. We will also see what Chair Powell mentions today in the Jackson Hole meeting or event because if the chairman does indicate that the revision in jobs data point is a concern, it might sort of seal the expectation of a rate cut in the September meeting. But it is possible that the chairman still indicates that the unemployment rate is relatively low. In the last press conference, the chairman was very much focused on the unemployment rate and that has not changed in the last print despite the revision to the non-farm payrolls. We will see what Chair Powell decides to focus on. Currently, we think that the August print will be very important for the Fed whether they cut in September or not.
What sort of signals is the bond market giving to the investors right now because we are seeing mixed movement, though the 10-year yields seem to be falling a little bit while the 30-year yields are seen to be rising.
Chetan Ahya: Yes, the challenge for the bond market is that inflation at the starting point is still relatively high and what is very different in this cycle is that the private sector balance sheets are in a very good shape. So, if the Fed cuts interest rates, at the same time, private sector balance sheets are in a good shape. So, if private sector growth comes back, as the fiscal deficit is going to expand in 2026 because of the tax cuts that have been already announced, there will be strong demand from the government side and if the private demand also picks up, that will be a concern for the bond market.
So, it will be interesting to see what the reaction of the bond market is as the Fed takes up its rate cuts. Our house view is that it comes alongside growth slowdown, i.e., private sector growth does not pick up immediately and so our global macro strategy team is expecting the 10-year bond yield to go down to 4% by end of this year.
When the Fed cuts rates eventually, don’t you see a flight of flows moving back into the US?
Chetan Ahya: Generally that happens if Fed cuts in response to a recession type of risk. We do not see that in this cycle. We are expecting a slowdown in US growth. We are expecting it to slow to 1% year-on-year by the fourth quarter of this year from 2% that we saw in the print in the second quarter, but we are not expecting a recession. Our house view is that the dollar is going to still see further decline for two reasons.
Number one is that there is the macro risk premium that the investors are attaching to the US current macro situation in terms of policy uncertainty, high fiscal deficit, rising public debt to GDP and then the second reason is the fact that as the Fed cuts interest rates, the interest rate differentials between US and some of the trading partners particularly the DM ones will result into additional weakness in the dollar. As far as the flows are concerned, we are not expecting it to weigh on the dollar. The dollar should not appreciate and therefore you should not be expecting a lot of capital inflows flowing back into the US.
You track India and China very closely. We have just had comments coming in yesterday from China saying that if the US is not willing to accept India’s goods based on the high tariff, China’s markets are open for India’s goods. Help us understand how this would shape up macros for both of these nations in terms of their export and import figures.
Chetan Ahya: Well, as far as the trade is concerned, there is definitely a lot more scope for India and China to have more trade. The challenge for India though is what to export to China because almost everything that India is able to export to the US, China is also able to export that to the rest of the world. So, there is a need to figure out a market in China for Indian products which is something that China can import from India.
The other way around, i.e., India needs to import products from China is a huge one particularly as we know that India is trying to get more into manufacturing. It needs a lot of capital equipment and some of the components that India wants to make like iPhones, needs to come from China. The India-China trade relationship is imbalanced and what we need to still see is the evidence of what are the products that India can export to China more.