Author: Growthfiniti@admin

India’s inflation rose to 6.2% in October 2024, marking the highest rate in 14 months. We anticipate that November inflation figures will likely be around 5.3%, with the average inflation for FY25 now estimated at 4.8%-4.9%, compared to the RBI’s target of 4.5%. Inflation is expected to decrease from January onwards, primarily due to base effects.

State-Level Inflation Trends

Larger states continue to see inflation rates surpassing the national average. Among them, Chhattisgarh recorded the highest rate at 8.8% in October, followed by Bihar at 7.9% and Odisha at 7.5%. Notably, year-on-year changes in inflation are significantly outpacing year-to-date changes; for instance, seven states have experienced year-on-year inflation increases of more than 2%. This suggests that food price momentum continues to rise.

The gap between urban and rural inflation trends has remained substantial for the eighth consecutive month, with rural households experiencing inflation 1.07% higher than urban households. This disparity is largely driven by higher food prices, as food items make up 54.2% of the rural inflation basket, compared to 36.3% in the urban basket.

Vegetable Prices and CPI Outlook

We expect some moderation in vegetable prices in November, with retail data up to November 11 indicating a decline. Although headline CPI inflation peaked in October 2024, November and December figures could still exceed 5%. Amid currency market volatility, a higher inflation figure might serve as an advantage for the RBI, potentially delaying a rate-cutting cycle.

Food inflation remains a significant concern, particularly in vegetables, which saw a sharp rise from 10.75% in August 2024 to 42.2% in October 2024. An analysis of the components contributing to year-on-year food inflation shows that vegetables are the largest contributor to both year-on-year and month-on-month changes. We expect some moderation in vegetable prices in November, as retail price data up to November 11 indicates a decline.

CPI Inflation Across States

State-wise, larger states continue to show inflation rates above the national average. In October, Chhattisgarh recorded the highest inflation rate at 8.8%, followed by Bihar at 7.9% and Odisha at 7.5%. A comparison of year-on-year changes with year-to-date changes reveals that year-on-year inflation increases are outpacing year-to-date trends. For instance, seven states have experienced year-on-year inflation increases exceeding 2%. Only in Telangana has inflation declined since April 2024, although it rose slightly compared to October 2023.

Rural vs. Urban Inflation Comparison

The gap between urban and rural inflation trends has persisted for the eighth month, with rural households facing inflation rates 1.07% higher than urban households. This is largely due to higher food prices, as food items comprise 54.2% of the rural inflation basket compared to 36.3% in the urban basket. While urban inflation rose more year-on-year in September 2024, rural inflation saw a higher year-on-year increase of 0.82% in October 2024 compared to urban inflation.

Industrial production (IIP) grew by 3.1% in September 2024, after contracting by 0.1% in August 2024. The mining, manufacturing, and electricity sectors grew by 0.2%, 3.9%, and 0.5%, respectively. Consumer nondurables increased by 2.7% in September 2024 after a decline of 3.5% in August 2024, indicating continued momentum in rural demand.

We are now less optimistic about a rate cut in February, and we believe the first rate cut may be postponed beyond February 2025.

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With Donald Trump confirmed as the new U.S. President and Republicans likely controlling both the Senate and House (a “Red Sweep”), markets are bracing for potential shifts in economic policy and investment dynamics. This development has fueled a global “risk-on” rally, where investors are optimistic and shifting capital into riskier assets like stocks, the U.S. dollar (USD), and cryptocurrencies. However, the fundamentals suggest that high volatility may continue, which could affect portfolios in both the short and long term.

Let’s explore how this new political landscape might shape the global market and what it means for Indian investors.

A Global Market Rally – But With High Volatility

The Trump Effect

The “Trump trade” is back, with investors expecting policies that may benefit businesses, such as tax cuts and spending on infrastructure and defence. However, these expectations come with a catch. While markets are rallying now, global growth and inflation are likely to experience increased fluctuations. This higher structural volatility challenges traditional investment strategies like “buying the dip” (investing after a price drop) and timing market rallies. Instead, investors may need to take a more flexible, adaptive approach to navigate the ups and downs that lie ahead.

Interest Rates on the Rise

A “rising term premium” is a trend likely to persist under Trump’s economic policies. This means that bond yields are expected to climb, making borrowing more expensive and affecting the returns on fixed-income assets. Higher yields also raise the likelihood of “currency wars” — situations where countries might try to weaken their currencies to boost exports. These developments, if sustained, could redefine the risks for various asset classes over the coming years.

Currency Volatility

One early indicator of these shifts can be seen in currency markets. The U.S. dollar index (DXY) could rise to 110. Such moves would have significant ripple effects across economies, particularly emerging markets with weaker currencies.

India: Facing FX and Rates Market Turbulence

For India, the immediate effects of Trump’s presidency are likely to be felt in the FX (foreign exchange) and rates markets.

The Indian Rupee (INR)

The INR may weaken due to currency pressures. The INR’s natural weakening bias could create challenges for Indian investors, who may need to consider hedging strategies for international investments.

Bond and FX Volatility

The rise in bond yields and currency fluctuations could lead to increased volatility in the bond and FX markets, potentially putting pressure on the Reserve Bank of India (RBI) to prioritise financial stability over its usual focus on inflation management. This shift might limit the RBI’s ability to cut interest rates, potentially resulting in a shorter rate-cut cycle than anticipated.

The Market Impact of Trump’s Economic Policies

Trump’s economic strategy involves tax cuts, higher spending on infrastructure and defence, and significant changes to trade policy. Here’s how these factors are expected to play out:

1. Fiscal Expansion
   Trump’s proposed extension of the 2017 tax cuts, set to expire in 2025, would add around $4.6 trillion to the U.S. deficit over the next decade, potentially rising to $7.5 trillion with expanded policies. This fiscal stimulus could lead to higher interest rates and influence bond markets worldwide.
2. Tariff-Driven Trade Policies
   Trump’s stance on trade includes tariffs such as a proposed 60% tax on Chinese imports and 100% on electric vehicles from Mexico. These policies could benefit certain U.S. industries but also increase costs for U.S. consumers and businesses. Tariffs of this scale would heighten trade tensions, disrupt global supply chains, and increase operational costs for companies with international exposure.
3. Implications for the Dollar
   While Trump has previously favoured a weaker dollar to benefit U.S. exporters, the fiscal stimulus under his administration might actually strengthen the USD, amplifying volatility. This trend may exert pressure on Asian emerging market currencies, including the INR, potentially dragging down purchasing power and investment returns in those regions.

What This Means for Indian Investors

India’s lower reliance on foreign portfolio investors (FPIs) for sovereign debt (around 3%) and its strong domestic demand could help it maintain a relatively lower bond risk premium than some other emerging markets. Indian equities may see temporary gains due to speculative moves by FPIs, but sustained growth in earnings and a solid fiscal position will be key to driving long-term gains.

How Growthfiniti Wealth Can Help You Navigate These Shifts

As volatility becomes the new normal, staying agile and informed is critical for high-net-worth individuals. At Growthfiniti Wealth, we specialise in crafting strategies that anticipate and adapt to market changes, allowing clients to seize opportunities even when market conditions are uncertain.

For investors navigating the impact of Trump’s presidency on global and Indian markets, we’re here to provide guidance that goes beyond the headlines. Get in touch with our team to learn how we can help fortify your portfolio against the evolving financial landscape and keep your wealth secure.