Powell, Das & their special interests

Recent statements by central bankers in the US and India have divergent messages on timelines for interest rate cuts. For US Federal Reserve chair Jerome Powell, the door seems to be opening for rate cuts. However, RBI guv Shaktikanta Das says it's too early to talk about cuts. The Fed is evaluating the risks of undershooting leading to a revival in inflation versus overshooting and jeopardising growth. At this point, the American central bank sees these risks as evenly balanced. Its Indian counterpart has a more sanguine approach to growth, but is wary of supply-side factors that could jolt inflation off target. Powell will cut rates before inflation arrives at its target. That certainty is lacking for Das.

This increases the odds of interest rates falling earlier in the US than in India. In a way, this is on expected lines because the US rate rose much faster during a synchronised upcycle. The narrowed differential has affected capital flows, and a reversal to trend would be positive for emerging markets equity, where India seems to be the flavour of the season. Equity investors globally have been anticipating a Fed rate cut for the better part of the year. However, it may not materialise on cue for the upcoming US presidential elections in November, a point Powell drove home to lawmakers while admitting the economic conditions were becoming favourable. Das has not had to face such expectations with India's general elections, but is facing doubts within the rate-setting committee over potential growth sacrifice.

Both gentlemen are taking up positions for a reset in growth-inflation dynamics at the end of this interest rate cycle - Powell for the end of an era of very low rates, and Das for a structural change in India's potential to grow. This should squeeze the interest rate differential, although capital flows will also be influenced by India's improving credit ratings as it speeds up its fiscal recovery relative to the US.