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Kevin Warsh's nomination as the next Fed chair surprised the markets, especially precious metals segment. US-based Aditya Bhave, senior US economist at BofA Global Research, tells Puneet Wadhwa in an email interview that with the US midterm elections in November, they expect trade policy to pivot to a more supportive stance for growth. The recent announcement of the India-US trade deal, he said, has reduced uncertainty around India’s growth outlook. Edited excerpts:
What's your view on India?
Our India strategists believe that the Indian markets (Nifty Index) are already trading in the upper band of long-term valuations and thus valuation expansion/re-rating led upside is likely limited. They believe returns from here on out would mirror earnings growth, which could accelerate to 14 per cent in FY27 from the mid-single digit earnings growth Nifty witnessed in FY25 & FY26. They, therefore, see 13 per cent upside for Nifty by the year-end (Dec’26).
How do you see the economic growth in India play out over the next 12 months?
India weathered significant external headwinds last year. Our India economists recently upgraded their forecasts on the back of improvement in the data flow. They now look for 6.8 per cent GDP growth in FY27. They see private consumption growing consistently above 7 per cent through the next 12 months, though investment spending is likely to moderate.
The recent announcement of the India-US trade deal has reduced uncertainty around India’s growth outlook. Our India team doesn’t see further cuts by the Reserve Bank of India (RBI) in the next 12 months, unless there is some weakness in growth following the change in the GDP series. They see this as a low-probability outcome.
How do you think the US economy will shape up in 2026 in the backdrop of a challenging geopolitical situation?
We are bullish on the US economy. We are forecasting 2.8 per cent GDP (gross domestic product) growth in 2026. Our optimism is driven by five factors. First, the OBBBA (One Big Beautiful Bill Act), which was passed last summer, should add 0.3-0.4pp to GDP growth this year via consumer and capex stimulus. Second, the 75 basis points (bp) of Fed cuts late last year should work their way through the economy in coming months.
Third, with the midterm elections in November, we expect trade policy to pivot to a more supportive stance for growth. Fourth, AI-related investment should continue to grow at a solid pace this year. Last, the government shutdown late last year will mechanically boost 2026 GDP growth.
Do you see actions of the US Federal Reserve (US Fed) being driven more by political compulsions rather than economic concerns?
Kevin Warsh, who has been nominated to be the Chair of the Federal Reserve, has called for significant rate cuts. His premise is partly that AI-related productivity growth will be disinflationary. However, if GDP growth is robust in the first half of the year – as we expect – it might be difficult for him to convince the rest of the Federal Open Market Committee (FOMC) that cuts are needed to support the economy. Especially if there is no progress on inflation, which has been stuck above the Fed’s target for nearly five years.
Did the global financial markets, especially the precious metals, over-reacted to the Fed chair nominee?
We were surprised by the market reaction to Kevin Warsh’s nomination. His recent comments on Fed policy rates have been dovish. Although he has retained a hawkish stance on the Fed’s balance sheet, it will be very challenging to shrink the $6.6 trillion balance sheet absent significant banking deregulation. Even then, the scope for reduction is only modest.
We would not expect Warsh to be hawkish in practice on either policy rates or the balance sheet. It’s possible that the market response to his nomination was more due to pricing out of outcomes under other nominees, who had taken a far more dovish stance than Warsh on balance-sheet policy.
What are the key risks to the US economy over the next few months?
The proximate downside risk to the US economy is that the labor market, which has been soft for a few quarters, deteriorates significantly further. If the unemployment rate rises to 5 per cent or more, spending could collapse under the weight of labor income losses. Markets over-reacted to the drop in the unemployment rate to 4.4 per cent in December. It had been rising for a few consecutive months before that, and we see about a one-in-four chance that it will start increasing steadily again.
Another risk is that AI investment could slow if power supply turns out to be a major bottleneck. If an AI investment slowdown (or any other factor) causes a big sell-off in tech stocks, which will probably also have knock-on effects for consumption, given that higher-income spending appears to be partly driven by equity wealth effects. Any shock to the US economy would have substantial knock-on effects on the rest of the world. That said, the dollar will most likely remain the world’s reserve currency. This reduces the urgency for fiscal tightening by generating additional demand for US Treasury securities.
What's the road ahead for US bond yields and 10-year GSec in India?
Our rates strategists expect US 10-year yields to remain range-bound, ending the year at 4.25 per cent. We see upside risks if the strong growth that we are forecasting causes a pickup in inflation, or the Fed cuts rates too aggressively.
It’s a similar story in India: our economists think yields will remain in the 6.65-6.75 per cent range, because positioning is light. Stepping back, deficit concerns are coming to the fore across developed markets, not just in Japan. As a result, in the last several months there has been broad debasement of fiat currencies in favor of commodities, particularly gold.
