The US CPI numbers for December came in a touch softer than expected with core CPI at 0.2%mom versus consensus of 0.3%mom. The key message is still a contained inflationary impact from tariffs at an aggregate level, even as the details were quite volatile and showed some continued lingering signs of impact of data unavailability from the government shutdown. Airline fares rose by 5% and household equipment and furnishings rose by 3%, while on the flipside appliances, jewelry, watches and used cars saw the largest disinflation.
Overall, we still think that the Fed will cut rates more and faster than what is priced by markets right now, and on top of contained inflation pressures a softer labour market through 2026 will also be key for our view. Continued attacks on Fed independence and Trump’s proclivity to push for lower rates is another key reason behind our view and we forecast US Fed funds rates to fall below 3% by 3Q2026.
Across Asia FX, a combination of a weaker JPY coupled with higher oil prices weighed on the likes of PHP, INR, KRW and THB to some extent, but with this was also driven by local factors. In India, the important development was a delay in inclusion of Indian government bonds to the Bloomberg Global Aggregate Index, which said that it will give an update by mid-2026. The index provider said that it intends to keep the review of Indian government bonds for the index “open and ongoing”.
From an FX perspective for INR, inclusion of Indian bonds into the Bloomberg Global Agg could have brought anywhere between US$15-20bn of flows over time, assuming a ultimate weight of 0.75-1%. This would have been important given the drying up of capital inflows, tariff uncertainty and as such, continued pressure for INR to weaken. The next catalyst for INR will likely be the upcoming Union Budget 2026 scheduled for 1 Feb and markets will be watching the extent of commitment towards fiscal consolidation and what that implies for macro stability. We forecast USD/INR rising towards the 92.00 handle, underperforming key G10 and Asia FX pairs.
