By Jaspreet Singh Arora
A lot has been spoken of the rising interest rates this year and where it is headed. In this article, we will compare India v/s US and see how these two countries differ in terms of trajectory, levels and most importantly, the current position that these countries are in. We also take a look at the most important driving force in today’s interest rate rise, INFLATION. How are the two countries stacked up in terms of inflation and who is better equipped to handle it? Let’s dive in!
US interest rates in an upward trend.
US interest rates have been hiked 300bps cumulatively post pandemic and are now above its previous peak (5yr basis). Fed remains committed to achieving its 2% CPI inflation target (8.2% in Sep ‘22). Rates are expected to reach 4% and stay there in 2023 before moving down again in 2024 as inflation eases. The US 10yr G-Sec is already pricing in the expectation of future rate hikes.
India much better placed
India has hiked repo rate by a cumulative 190bps since the pandemic lows, lower than US’ 300bps cumulative hike. India’s interest rate is still below its previous peak (5yr basis) at this juncture compared to the US. India has been able to manage its inflation much better led by active Government policy action. India’s inflation rate (7.4% in Sep ‘22) is lower than US (8.2% in Sep ‘22), contrary to historical trends. Despite the rate hikes, credit growth continues to pick up, clocking 16.2% YoY growth in Sep ‘22 (a decadal high!).
India CPI in relation to US CPI – now v/s 6-year average of FY14-20 – trends have reversed
The US has seen its CPI inflation skyrocket to 8%+ in each of the last 7 months from just 0.1% somewhere at the start of the pandemic (May’20). US CPI over the past 6 years prior to the pandemic (FY14-20) was also pretty low and manageable, averaging 1.1%. The current 8%+ levels are also much higher than the Fed’s inflation target of 2%. This gives us a sense of the gravity of the situation and the need for the Fed’s action in terms of swift rate hikes. India on the other hand, has managed its inflation quite well.
The lowest point of India’s CPI inflation in the pandemic era stood at 4% (Jan ’21), which is currently hovering at ~7%. The gap between India’s current inflation (7%) and the 6-year average (4.5%) is also not very high, compared to that of the US. Additionally, the RBI’s inflation target on the upper end is 6%, making it not such a daunting task to bring down the inflation within the targeted range. In fact, RBI estimates India’s inflation to lower to 5.8% by Q4FY23.
Lending rates, fast rising in the US
Another comparison we make is the lending rates between India and US. We stack up the 30yr fixed mortgage rates in the US with the lending rates in India. While both have seen a structural decline since the early 80’s, US 30yr mortgage rates have almost doubled since the start of CY22, and are at the highest level since 2007. In comparison, our lending rates are not at alarming levels.
In its latest report released in Oct ‘22, IMF has also highlighted India as a standout economy amongst the gloom and doom surrounding the global economy. India’s growth is underpinned by its structural reforms, the IMF said.
India’s interest rate trajectory has seen a more measured rise when compared to the US. Even when compared on a 5-year basis, India is yet to breach the interest rate peak whereas US is already past its 5yr peak. India’s underlying economy is exhibiting immense strength and ready for take-off, reflective in the bank credit growth at a decadal high, undeterred by the rising interest rates. The IMF in its latest report also hails India as being a bright spot in the global doom.
India has also managed its inflation way better than the US and is well-equipped to contain it within RBI’s set limits. The US on the other hand has a long way to go before it tames inflation. The lending rate comparison also puts India ahead of the US. The US have seen its US 30yr mortgage rates doubling and reaching highest levels since ’07, whereas India’s lending rates are not at alarming levels.
(Jaspreet Singh Arora is Chief Investment Officer, Research & Ranking. The views expressed are the author’s own. Please consult your financial advisor before investing)