Inflation, not recession, is the risk: Taimur Baig explains why the market may be getting it wrong

As markets cheer the possibility of interest rate cuts amid recession fears, Taimur Baig, Managing Director and Chief Economist at DBS Group Research, offers a sharp reality check—it’s inflation, not recession, that poses the bigger threat. He believes investors are misreading the signals, and the Federal Reserve may have less room to ease policy than markets expect.”US producers are clear in their signalling. They will raise prices. They are raising prices,” Baig said, citing survey data and corporate commentary. He explained that tariffs and supply chain pressures are fueling cost increases, making it hard for the US Federal Reserve to loosen policy as the White House may hope.

Despite the concerns, Baig said the US economy isn’t heading toward collapse. First quarter growth data looked weak, but he stated that it was distorted by companies frontloading imports ahead of expected tariffs. Adjusting for that, the economy performed decently, and Baig expects first-half 2025 growth to land between 1.5% and 2%. “I don’t think the US economy is about to crater,” he added.

On trade, Baig was clear: don’t expect a real deal. Citing discussions during recent International Monetary Fund (IMF)-World Bank meetings, he said most negotiations are not being handled by trade experts but are driven by political interests. “The discussion is entirely at a rather high level, political level… not the kind of discussion you want to have between trade representatives,” Baig observed.

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He believes the deals being hinted at will likely resemble vague agreements or MOUs—similar to what the Trump administration signed with China in its first term—rather than legally binding trade treaties.This lack of substance undercuts the recent market rally, which Baig described as more relief-driven than grounded in reality. “This relief rally… to me is more like a dead cat bounce than anything else,” he said.

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He also expects the US dollar to stabilise or strengthen, reversing recent weakness as sticky inflation leads to fewer rate cuts than expected. This limits the upside for emerging market currencies like the Indian rupee. While the rupee has gained from lower oil prices and returning foreign flows, Baig cautioned that “maybe not much more [upside] left.”

Still, Baig sees some silver linings for India. The country stands to benefit from global supply chain realignments and is in a better macroeconomic position as an oil importer and capital receiver. The shifting dynamics, though modest in scale, are still tilted in India’s favour.

For the entire interview, watch the accompanying video

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