<p>Under the Donald Trump Presidency, financial markets globally have come under a bout of a bear hammering. The S&P 500 index, which tracks the stock performance of 500 of the largest companies listed on stock exchanges in the United States, fell from around 6100 in end January 2025 to 5800 at the time of writing this paper. The more representative Nasdaq Composite, followed in toe with a 10% drop, wiping out billions of dollars in shareholder wealth. Closer home, the Nifty 50 that represents the float-weighted average of 50 of the largest Indian companies, listed on the National Stock Exchange, fell by 15% from its 6-month peak. The markets are understandably terrified about President Trump’s trade and investment policies. These are likely to hurt the balance sheets of several global corporations.</p><p>But market worries do not end there. Inflation, which the United States Federal Reserve assumed had been tamed, has unsurprisingly demonstrated a new spark of energy and seems to be edging upwards again. So, the interest rate cuts factored in previously by markets, are now open to question. It’s a double whammy. In January America’s “core” consumer-price index, which strips out volatile food and energy costs, jumped by 5.5% at an annualised rate. As The Economist Newspaper argued in a recent piece, more bothersome is that Americans are starting to expect higher inflation. In February, preliminary data from the University of Michigan’s consumer survey showed that the median expectation for price growth over the next year had reached 4.3%, surging by 1.7 percentage points, the largest rise since 1979.</p><p>This gap between inflation expectations and the historical trend, appears to be driven by tariff threats. Consumers’ uncertainty about inflation is understandably elevated. Many appear to be taking the president at his word when he warns that “prices could go up somewhat short term” with inflation expectations to be nearly 5% in a year’s time, tugging up the overall average. The Fed must obviously remain concerned that restoring price stability comes at high economic cost. Consequently, defying earlier beliefs and guidance, US interest rates are unlikely to be lowered in a hurry. This has implications across the world and more so in emerging markets that often try and implement a managed float, through tweaks in monetary policies, of their currencies to the dollar.</p><p>We expect the US dollar to gain in value against a basket of global currencies, as higher inflation in America will force policy makers, in its central bank, to keep a hawkish stance on interest rates. With higher yields, therefore, capital will be attracted back to lower risk returns offered in the US treasuries, with a consequent sell off in emerging market bonds and equities. These logically come with higher levels of risk and investors will work through algorithms that accommodate risk return equations. Sadly, thus, the desire to lower interest rates by the Reserve Bank of India, will need to be tempered with global developments. As we have consistently argued in previous papers, interest rates will remain higher for longer across the world (except in China which has to contend with a totally different set of problems).</p><p>With consumer demand flagging, the business outlook in India, as elsewhere, will remain subdued. The risks are now weighed heavily to the downside and CFOs’ must take note. Whilst your columnist has generally limited himself to following trends, and refrained from number predictions, he believes that the Rupee may touch Rs 91.5 to 92 by year end. That will bring further worries towards imported inflation complicating the planning cycle for 2025-26.</p>
<p>Under the Donald Trump Presidency, financial markets globally have come under a bout of a bear hammering. The S&P 500 index, which tracks the stock performance of 500 of the largest companies listed on stock exchanges in the United States, fell from around 6100 in end January 2025 to 5800 at the time of writing this paper. The more representative Nasdaq Composite, followed in toe with a 10% drop, wiping out billions of dollars in shareholder wealth. Closer home, the Nifty 50 that represents the float-weighted average of 50 of the largest Indian companies, listed on the National Stock Exchange, fell by 15% from its 6-month peak. The markets are understandably terrified about President Trump’s trade and investment policies. These are likely to hurt the balance sheets of several global corporations.</p><p>But market worries do not end there. Inflation, which the United States Federal Reserve assumed had been tamed, has unsurprisingly demonstrated a new spark of energy and seems to be edging upwards again. So, the interest rate cuts factored in previously by markets, are now open to question. It’s a double whammy. In January America’s “core” consumer-price index, which strips out volatile food and energy costs, jumped by 5.5% at an annualised rate. As The Economist Newspaper argued in a recent piece, more bothersome is that Americans are starting to expect higher inflation. In February, preliminary data from the University of Michigan’s consumer survey showed that the median expectation for price growth over the next year had reached 4.3%, surging by 1.7 percentage points, the largest rise since 1979.</p><p>This gap between inflation expectations and the historical trend, appears to be driven by tariff threats. Consumers’ uncertainty about inflation is understandably elevated. Many appear to be taking the president at his word when he warns that “prices could go up somewhat short term” with inflation expectations to be nearly 5% in a year’s time, tugging up the overall average. The Fed must obviously remain concerned that restoring price stability comes at high economic cost. Consequently, defying earlier beliefs and guidance, US interest rates are unlikely to be lowered in a hurry. This has implications across the world and more so in emerging markets that often try and implement a managed float, through tweaks in monetary policies, of their currencies to the dollar.</p><p>We expect the US dollar to gain in value against a basket of global currencies, as higher inflation in America will force policy makers, in its central bank, to keep a hawkish stance on interest rates. With higher yields, therefore, capital will be attracted back to lower risk returns offered in the US treasuries, with a consequent sell off in emerging market bonds and equities. These logically come with higher levels of risk and investors will work through algorithms that accommodate risk return equations. Sadly, thus, the desire to lower interest rates by the Reserve Bank of India, will need to be tempered with global developments. As we have consistently argued in previous papers, interest rates will remain higher for longer across the world (except in China which has to contend with a totally different set of problems).</p><p>With consumer demand flagging, the business outlook in India, as elsewhere, will remain subdued. The risks are now weighed heavily to the downside and CFOs’ must take note. Whilst your columnist has generally limited himself to following trends, and refrained from number predictions, he believes that the Rupee may touch Rs 91.5 to 92 by year end. That will bring further worries towards imported inflation complicating the planning cycle for 2025-26.</p>
