The INR slipped to its life-time low of 85.06 on Thursday, and IGB yields rose 3-4 bps across the curve following markedly hawkish FOMC Dec meeting outcome. The FOMC cut rates by 25 bps – this was along expected lines. Importantly, the dot-plot for the next two years was revised to signal fewer rate cuts. The median Fed fund rate for 2025 was seen at 3.9% (vs 3.4% in Sep meet) and 3.4% in 2026 (vs 2.9% earlier). The revised dot plot indicates only 50 bps easing in the next year as against 100 bps projected in the Sep meeting. In addition to this, both the PCE and core PCE inflation was revised upwards to 2.5% each (from 2.1% and 2.2% earlier respectively). Fed Chair Powell noted that policy conditions were significantly less restrictive, and that members will be more cautious around additional easing. Mr. Powell acknowledged that risks to labor markets were diminished and added that the revised inflation forecast factored in the impact of the new administration’s policies. Going forward, India rates markets will be guided by forthcoming US inflation, movements in INR and evolving domestic liquidity conditions. Sharp moves lower in INR were likely limited on potential downward revision in Nov record merchandise trade deficit. This is after a series of media reports flagged error on estimation around gold import volumes.
