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• Both March and May are looking highly improbable for rate cuts.
• Analysts are expressing concerns over the recent rise in US bond yields and the US Dollar Index.
• Experts say India has shown resilience within the emerging market space.

The news of surge in US CPI inflation has ignited speculation about the Federal Reserve’s plans for rate cuts, causing significant ripples in the financial markets.

With the prospect of a March rate cut virtually non-existent, and May now looking highly improbable following the US Consumer Price Index (CPI) data release, investors are reevaluating their expectations.

When will rate cuts happen?

The recent surge in US equities, mainly seen in the S&P 500 scaling a record level of 5,000, has been partly fuelled by expectations of rate cuts. However, the question looms: has the market fully priced in the potential for fewer rate cuts than previously anticipated?

Geoffery Dennis, an independent Emerging Markets commentator, told Moneycontrol that there may still be some market exuberance to temper if only three rate cuts are on the horizon.

Regarding the likelihood of a rate cut in May, he stated that while he had previously anticipated a rate cut around June or July, the stronger-than-expected inflation report has pushed the timeline further out.

The Federal Reserve’s dot plot, anticipated during the March meeting, will provide further clarity on the central bank’s outlook.

He expressed skepticism about the possibility of the Fed reducing the expected rate cut to 50 basis points for the year, maintaining that the central bank is likely to stick to its projection of three rate cuts.

However, he acknowledged the concern surrounding headline inflation stabilizing around 3 percent and the persistently high service sector inflation.

US CPI impact on India, emerging markets

Regarding global implications, Dennis emphasized India’s resilience within the emerging market space, citing its outperformance and robust growth story. Despite challenges, India’s trajectory remains broadly positive, although validating valuations requires sustained earnings growth.

While uncertainties persist in the wake of the inflation surge, he remains cautiously optimistic, anticipating a return to positive market sentiment once the impact of the recent inflation figures is fully digested.

The financial landscape remains dynamic, with investors closely monitoring developments and adjusting their strategies accordingly to navigate the evolving market conditions.

What rise in US Dollar index means

Analysts are expressing concerns over the recent rise in US bond yields and the US Dollar Index, suggesting potential negative implications for emerging markets, including India. They anticipate that this trend could lead to a period of 2-3 trading sessions characterized by negative sentiment.

Commenting on the matter, Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, said that the combination of increasing US bond yields and a strengthening Dollar Index is particularly worrisome for emerging markets. He anticipates that they will underperform in the near term due to this “double whammy” effect.

While the recent inflation data is expected to impact sentiment in the short term, analysts believe that the market’s reaction may not be severe as investors await further data points.

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