'US Fed To Hold Rates Steady In July, Tariff Above 20% To Disappoint Indian Market': Dr VK Vijayakumar

The US Federal Reserve is set to announce its new interest rate and monetary policy decision on Wednesday, July 30, after a two-day Federal Open Market Committee (FOMC) meeting. US Fed chair Jerome Powell-led rate-setting panel has maintained its federal funds rate at 4.25-4.50% since January, keeping it unchanged for four straight policy meetings.

The US central bank had slashed its benchmark rate by a full percentage point in 2024 but has kept the policy on hold this year as it waits for the evolving economic outlook and further clarity about the impact of US tariff policies. The projections from the quarterly ‘dot plot’ released in June showed that policymakers foresee a 50 basis points or 0.5% worth cut in 2025.

Ahead of the US Fed policy verdict, Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Investments Ltd said in interview with NDTV Profit's Nikita Prasad that the Fed would likely hold the key interest rates steady on July 30. The D-Street expert also believes that if the tariff rate imposed on India is lower than 20%, the Indian market will welcome it. However, any disappointment on this front, would be a 'negative' from the market perspective.

Edited excerpts from the interview:

1.Amid the ongoing US tariff policy and the associated risk to the world's largest economy, what are your key expectations from the upcoming US Fed's monetary policy on July 30? Do you foresee any rate cuts at this time?

President Trump’s unprecedented tariff policy has disrupted international trade and global growth, too. Global growth is projected lower at 2.8% this year and the US economy is expected to grow only by about 1.8%. However, the high tariffs on imports to the US has not yet translated into higher inflation. But, higher inflation from higher tariffs appears inevitable. So, the Fed will be guarded on cutting rates. We don’t expect any rate cut in July.

2.The US Fed policy decision will come right before the August 1 deadline when country-specific tariffs will be implemented with US trading partners. How do you think the global market will react to the Fed policy decision, if an economic fallout awaits the US in the near-term?

The market has almost discounted a pause in rates. The Fed funds futures indicate that. Therefore, a pause by the Fed is unlikely to surprise the market. The Aug. 1 deadline, going by previous experience, is likely to be extended again for further negotiation to reach deals with countries with whom trade deals are pending.

3.Most market analysts are not pricing in the India-US trade deal as a trigger for the Indian stock market, while some say investors must be prepared for surprises. What is your assessment of India's trade deal with the US? How should domestic investors position themselves amid tariff-fueled volatility?

The near consensus view is that an interim deal is likely between US and India even though there are differences on areas like market access to the US in segments like the dairy industry. India is unlikely to offer any concessions in these areas. Yet, a deal is possible. What is unknown at this stage is the tariff rate that will be imposed on India.

If it is lower than 20%, that would be a positive, which the market will welcome. Any disappointment on this front would be a negative from the market perspective. More important than the tariffs, from the market perspective, is the corporate earnings in India, which has slowed down in FY25 and is showing only signs of modest recovery in FY26. This is the biggest challenge for the market in the short run.

4.Amid external triggers such as the US tariff risks and geopolitical conflicts, FIIs and FPIs have largely maintained a cautious stance over the Indian stock market in 2025. Do you think the India-US trade deal will impact FII outflows from Indian markets in any way?

FIIs were big sellers in India in the first three months of 2025. In the next three months they turned buyers. In July, the FIIs again changed their strategy from buying to selling. FIIs are more concerned about the valuations in the market.

When the valuations reach high levels, they sell and move money to cheaper markets and vice versa. FIIs are here for the long-term. Their strategy in the short-term - whether to buy or sell – is largely decided by the valuations and earnings prospects of India vi-a-vis other markets.

5.Despite constant criticism from the US President, Jerome Powell may continue the hawkish stance on policy. Global investors expect the Fed to resume cutting rates in Sept. Is the Fed behind the curve, especially when most central banks, including RBI, have cut rates to boost growth? How many interest rate cuts by the US Fed do you foresee in 2025 and what would be the size of those cuts?

The timing and quantum of the rate cut will depend on the incoming data and evolving outlook. As of now, the US Fed is not behind the curve. We expect two rate cuts in 2025 by 25 bp each perhaps by September and October.

6.Compared to the US Fed, is the RBI in a better position to support India's economic growth, despite the risk arising from US tariffs? How do you see the US and Indian economy in the current scenario, with regards to their respective monetary policies?

The US economy is slowing down and the tariff-related disruptions are likely to accelerate the slowdown. However, since higher tariffs can spike inflation, the Fed is likely to cut only after ensuring that inflation remains under control. The Indian economy is in good shape. The macros are solid: GDP growth rate, fiscal and current account deficits, forex reserves and inflation are all positive. The challenge is in micros—corporate earnings.

CPI inflation in India is likely to undershoot the RBI’s estimate of 3.7% for FY26. But the MPC is unlikely to go for another rate cut soon. The RBI has already declared that they have front-loaded rate cuts. The RBI has gone the extra mile in cutting the CRR by 100 bp sending a message of strong monetary stimulus. The RBI is likely to wait and watch before further rate actions.

Disclaimer: The views and opinions expressed by the investment advisers on NDTV Profit are of their own and not of NDTV Profit. NDTV Profit advises users to consult with their own financial or investment adviser before taking any investment decision.