By Nishant Srivastava
The Central Banks around the world have been raising interest rates since the middle of 2022 after the continuous hostilities between Russia-Ukraine led to initial higher inflation across the globe. The Federal Reserve forecasts revised seems to be hawkish to combat the inflation as the terminal growth rate has moved to 4.4% by end of CY2022 AND 4.6% CY2023, so another 125 bps hike is expected in Nov and Dec which would keep the bond and equities markets volatile over the next few months. Brent crude prices are at a 7-month low and the sharp up move in the dollar index is keeping the commodities low which would help to fight inflation in the coming quarters. Any softening in the labour market and a clear indication of inflation moving to the target of 2% could witness some reversal in interest rates going forward.
The Bank of England raised its benchmark rate to 2.25%, matching its half-point increase last month, the biggest hike in 27 years. The decision was delayed a week as the United Kingdom mourned Queen Elizabeth II and follows economic relief measures announced by new Prime Minister Liz Truss’ government that are expected to ease inflation in the short term.
It is the bank’s seventh straight move to increase borrowing costs as rising food and energy prices fuel a cost-of-living crisis that is considered the worst in a generation. Despite facing a slumping currency, tight labour market and inflation near its highest in four decades, officials decided against acting more boldly as large hikes threaten to tip the economy into recession.
India seems to be some saviour from the high inflation and slow growth challenges as credit growth is upbeat and our corporate profits are improving over the past few quarters. Our headline CPI inflation is likely to remain at 7.0% y-o-y before easing to 6.5% by Feb’23 and falling below 6.0% in Mar’23. Further, it is projected to ease to 5.0-5.5% in FY24, implying that the 4.0% level is unlikely to come before FY25. Nevertheless, with the repo rate already at 5.4%, we have raised our terminal repo rate forecast to 6.0% (from 5.5%) by Dec’22. If, however, the RBI remains concerned about the Rupee and focuses more on the 4% target, we could see another hike in Feb’23E, taking the repo rate to 6.25% in this cycle.
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The Indian Rupee is the least depreciated currency pegged to the dollar among emerging markets which is helping to curb inflation and trade deficit, stronger currency can boost imports but the recent move to a new low above 80 levels on account of the Federal Reserve hike of 75 bps and dollar index trading at 20-year highs pose some risks in the short term.
We expect a 35-50 bps hike in repo rates in the current monetary policy next week and the projected inflation easing announcements in the coming years could provide a shot in the arm as we have witnessed a sharp fall in commodities prices. A serious global recession could present downside risks to our growth forecast due to which we could also witness volatility in our bond and equities markets.
(Nishant Srivastava, Head – Retail Broking and Distribution, Reliance Securities. Views expressed are the author’s own.)