Global markets are heading into 2026 amid growing uncertainty, with mixed signals from the US economy, a strong dollar and pressure on emerging market currencies like the Indian rupee.Jahangir Aziz, Head of Emerging Market Economic Research at JPMorgan, believes the US Federal Reserve is still likely to deliver one final rate cut in January before pausing for a long period.Aziz said the latest US non-farm payroll data should be seen in the context of recent months. When September, October and November numbers are combined, job creation has slowed sharply and is now running below trend.
This supports JPMorgan’s view that the Fed will cut rates once more in January, followed by a long pause and possible rate hikes only in 2027.
“We also have rate hikes in 2027 in the first half of the year, a 50 basis points, 25-25. So, I think that right now it is still on track for a January final rate cut, even though the Fed itself has in the last FOMC warned us not to be too excited about it.”Turning to India, Aziz said the rupee’s recent depreciation is a response to balance of payments pressures rather than a worrying rise in the current account deficit. India’s deficit, at around 1.2% of GDP, is modest by historical standards.He said, “The challenge is, why can’t India finance a measly 1.2% current account deficit. We have in the past, financed 2.50%, 3% deficit without creating any real headaches, without having these kinds of depreciating pressure. My issue is not with the current account deficit, per se, going up. It is the fact that we can’t even finance 1.2% of current account deficit.”The real issue, he said, is weak capital inflows, with foreign portfolio investment muted and foreign direct investment barely growing. Aziz argued that allowing the rupee to adjust is the right approach, as it absorbs external shocks and prevents monetary policy from being constrained by exchange rate management.On inflation, he expects headline inflation to rise modestly in 2026 due to base effects, but warned that persistently weak core inflation points to significant slack in the Indian economy, reflecting soft domestic demand and excess capacity.For the entire discussion, watch the accompanying video
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