Brief Macro: India – Overweight and more

In this briefing:

1. India – Overweight
2. The Fed’s Dovish Tilt: Unconvincing Articulation Invites Conspiracy Theories

1. India – Overweight

We reiterate our overweight call on Indian equities. Our December Austrian Stress Indicator update suggested that the business cycle was still stuck but the economy is gathering momentum. Fiscal policy has turned expansionary and will support consumption, particularly rural spending. Monetary conditions are easing and we expect the next move in policy rates to be down. The private investment cycle should be turning up by the end of the year. Strengthening economic activity together with an improvement in the current account balance should also underpin a recovery in the rupee. 

2. The Fed’s Dovish Tilt: Unconvincing Articulation Invites Conspiracy Theories

Confirmation that the Federal Open Market Committee (FOMC) has adopted a patient approach to policy conduct provoked an unjustified rally in risky assets due to the earlier hints from Fed officials, but incoming economic data may not necessarily guarantee that the next move in the federal funds rate will be in a downward direction.

Furthermore, markets also rallied due to an intimation that the Fed will consider stopping balance sheet shrinkage at an early juncture, but Chair Powell indicated that the federal funds rate remains the prime policy tool to alter monetary conditions in a normal economic environment, not balance sheet size.

Due to potential downside risks in the economic outlook, the FOMC has seemingly raised the bar for increasing the federal funds rate, thereby indicating a dovish tilt in its prospective policy conduct.

Some commentators believe Fed Chair Powell has downgraded the role of the Phillips Curve in setting policy by announcing a patient policy approach at full employment, thus additionally raising the possibility that the FOMC is prepared to tolerate an overshooting of its 2% inflation target.

Meanwhile, other observers are hinting that the Fed’s dovish policy tilt simply reflects damage inflicted on Chair Powell and the FOMC in the aftermath of the recent spat with President Trump.

Some commentators are citing poor communication to financial markets by the FOMC since last September for creating excessive volatility during 2018 Q4, and this has consequently forced the adoption of the patient policy approach to rectify past mistakes.