According to the report, while domestic inflation is expected to ease, volatile food prices and the potential inflationary impact of Trump’s policies could delay it. Inflationary pressures also have wide-ranging effects on financial markets.
The report notes that high inflation can lead to a stronger correlation between stock and bond performance, as seen in 2022 when inflation and a sharp rise in interest rates negatively affected both asset classes. . This situation can reduce the effectiveness of bonds as a hedge against market volatility, forcing investors to consider alternative strategies.
“In this scenario, a rebound in inflation could raise the stock-bond correlation, which could reduce the effectiveness of bonds as a buffer against volatility in risk assets,” the report said. ”
The report suggested that real assets, cash and gold can act as effective hedges against inflation. Adding further, defensive sectors such as consumer staples and high-quality stocks can provide stability during periods of inflation.
Despite these challenges, the RBI is expected to begin a series of rate cuts in 2025, likely to cut rates by 50-75 basis points as inflation nears its medium-term target of 4 percent. reaches However, the pace of rate cuts could be constrained by persistently high inflation and a cyclical uptick in economic growth.
The report highlights the complexity of the current economic environment, where global and domestic factors influence fiscal policy decisions. Investors and policymakers alike will need to carefully navigate these challenges to balance growth and stability in the economy.