“I remain in the camp that the RBI has more room over the next couple of years to cut rates than the market currently expects. You could see another 75 to even 100 basis points of rate cuts in two years,” he told CNBC-TV18.
Seth said the outlook for Indian equities remains positive in the medium to long term, despite near-term volatility. “I do think in the medium to long term, you will break out of the 26,000 level we saw in September last year. The outlook remains positive,” he said, adding that sector-specific trends will matter more. He continues to prefer consumption, infrastructure, financials, and defence, while being cautious on IT services given the impact of artificial intelligence on labour productivity.
On the global front, Seth expects the US Federal Reserve to cut rates in September, with the discussion shifting between 25 and 50 basis points. However, he noted that the steepening of the US yield curve is weighing on global bond markets, creating pressure even in India.
He flagged that the rupee has underperformed peers this year, despite a weaker dollar. “The dollar is weaker by almost 10% this year against major currencies, while the rupee is weaker against the dollar by about 1.5%,” Seth said. He attributed this to geopolitical uncertainty and US-India trade tensions, including the recent tariff hike, which he believes will not roll back to earlier levels of 15%.
These uncertainties have kept foreign portfolio investors (FPIs) cautious, but Seth expects flows to resume once the rupee stabilises and the RBI’s easing path becomes clearer. “I do think FPI buying will resume,” he said.
Below is the verbatim transcript of the interview.
Q: How do you explain the fall in Indian bond prices after a rating upgrade, after a double cut in June, and a CRR cut. Is the fiscal fear so high?
Seth: I don’t think it’s a fiscal fear right now. It’s a combination of the technical backdrop driven by domestic demand, which is not as strong for a variety of reasons, and the slowdown in FPI buying right now. I do think FPI buying will resume. The question is, what will drive that? It’ll be a combination of the path of monetary policy, where I do expect the RBI to continue on the path of monetary easing, especially given the geopolitical backdrop, the pressures we are seeing, and the stabilisation of the rupee, which is also facing some noise driven by geopolitics and the additional tariff hike from the US. So, I do think you will see FPIs resuming buying once you have a stable currency and monetary policy that seems to be more towards easing.
Q: The Indian understanding was that FPIs would be favourably tuned to India, especially after the rating upgrade. What is keeping the FPIs away? I think we are having a fairly negative number for FY26. In FY25, there was huge FPI buying because of the bond inclusion, but now it’s a negative $1.1 billion as of August 19. What’s scaring them? Are they worried that because of the GST cuts and a possible tax revenue slowdown, there will be a fiscal issue?
Seth: I think the main factor is geopolitical uncertainty, and to some extent how that impacts the currency markets.
If you look at the rupee relative to the dollar, the dollar is weaker by almost 10% this year against major currencies, while the rupee is weaker against the dollar by about 1.5%. So, it has underperformed not just developed market peers, but also emerging market peers. When you take an FPI view of the world, ratings matter, but they are not the primary driver of FPI positions. The main drivers are monetary policy and some stabilisation in the currency, which I do think you will see in the coming months.
Q: So, you expect FPI bond buying to resume?
Seth: I do think it will resume. Again, the other challenge, is coming out of the US—fiscal financing, the inflationary impulse, and the steepening of the curve. That steepening of the curve is influencing how investors look at global bond markets, not just the US. So, even if it’s a global bond aversion, you’re seeing a bit of that aversion here. You’re also seeing pressure because of correlations. Investors sitting on the long end of the US curve are sitting on losses right now.
Q: Do you expect a rate cut from Fed? What is the trajectory, and what about the 10-year bond yield in the US, even if there is a rate cut?
Seth: I do expect a rate cut. As we go through the non-farm payroll (NFP) on September 5 and the CPI report on September 11, I think the discussion might move more towards 25 bps versus 50 bps, rather than 0 bps or 25 bps. I think there’s room for the Fed to cut rates. Can they go very far? I’m not sure, but right now, there is room. There’s also an additional element—as we go into the last quarter of the year, the discussion will start around the Fed transition, the next Fed chair, and the closer we get to that, the less likely the Fed is to make major changes in policy. But the September meeting is live with a high potential of a cut. The reality is, the Fed controls the front end, and the rest of the world controls the 10-year. So, I don’t think the 10-year has a huge amount of room to rally. It might come down a bit, but the 10-30 curve might steepen even further.
Q: Actually, the 10-year bond yield has been between 4.3% and 4.5% forever, even after some of the rate cuts in 2024. Do you think it stays at 4.3%, or does it nudge if there is a 25 or even 50 basis point cut?
Seth: I think the 10-year does come down from there. That’s almost like the fulcrum point for the overall curve. The front end to the belly benefits from the Fed cut. It’s more the 30-year part, which I’m not sure about, and that’s why I said the 10-30 curve might steepen further despite Fed cuts.
Q: What’s the expectation on the Indian rupee? Can you give us a global view, or your clients’ view, on how they see the Indian trade balance and capital flows? Because capital inflows are also not coming, and there are jitters about the current account.
Seth: There are obviously multiple elements. To simplify, it’s the geopolitics, and the more important part is the combination of changes in alignment from a geopolitical perspective and the tariff itself, which was a big surprise for markets in the last month. That needs to settle down, although I’m less convinced that we are going back to the US-India relationship of six months ago. I think a shift has certainly happened there.
Q: So, your base case would be a 25% tariff, or maybe even higher?
Seth: I think it probably will be 25% in the end, but it’s not going back to 15%, which was the original expectation. This has implications for growth, which may take away 0.25-0.5% of growth, and also impacts the labour market because it hits labour-intensive sectors. That brings the focus back to the government to support growth. A combination of reforms—which are good, like simplification of GST—and some fiscal push will be required. That’s what markets are trying to gauge in terms of the current and capital account balance.
Q: Give us an equity view as well. The Indian equity indexes have also been in a range. What’s the expectation? Will India break out of this range and go back to at least the 26,000 highs? Is all the bad news already in the price?
Seth: I believe in the medium to long term, the India story remains intact. It might shift in terms of which sectors benefit more. One more aspect I would add: in addition to geopolitics, there’s a huge shift happening in labour productivity because of AI. How that plays out for one of India’s big sectors—IT services—I’m not sure it’s all positive. So, it will be more sector-specific. For the broad index, I do think in the medium to long term, you will break out of the 26,000 level we saw in September last year. The outlook remains positive. But as I said, investors are trying to realign between the new geopolitics, the new fiscal equation, and how AI plays out.
Q: And what sectors? Clearly, IT will not be a favourite, from what you’ve said. Any other sectors that stand out?
Seth: I continue to like consumer staples, consumer discretionary, financials, infrastructure, and defence. There are a number of sectors that are more domestically oriented in terms of their outlook, and hence will benefit from the combination of consumer demand and government support in the coming years.
Q: What’s your take on the Reserve Bank? Is there elbow room for more rate cuts? We have GST rate cuts and tax cuts, which would mean that some prices—apparently about 10 to 11% of the CPI basket—will come down. So, there could be that impact in the second half. Plus, practically all metals are now trading lower in Asian markets as well. So, is there scope for further disinflation, and therefore further rate cuts?
Seth: I remain in the camp that the RBI has more room over the next couple of years to cut rates than the market currently expects. If I have to take a view, I’d say you could see another 75 to even 100 basis points of rate cuts in two years. But that is predicated on continued disinflation, as you mentioned. One aspect that has always been very sensitive from an inflation perspective is oil prices. Oil has been very well-behaved in the low-to-mid 60s. If that changes because of supply-demand dynamics or geopolitics, it reduces the RBI’s room. But currently, can they cut rates another 75 basis points? I do think so.
