The brokerage doesn’t expect a normalisation in the US interest rates in 2015 to have any material impact on India, given that it would be offset by deeper unconventional monetary policy programmes of the Bank of Japan (BoJ) and European Central Bank (ECB) to stimulate their respective economies.
On Wednesday, the US Fed announced a closure of its third round of monetary easing, termed as quantitative easing, that it begun to roll back in early December 2013. It also indicated that if the US economy improves faster than expected, then the first rate hike could come sooner than anticipated.
“Markets have focused on the expected policy normalisation by the Fed in CY15, but the matter of global liquidity has been largely ignored,” says Kotak in the note.
While the ECB is seen expanding its balance sheet to early 2012 levels — which translates into an over euro 1 trillion additional liquidity from the current levels — even annually, BoJ will keep pumping money to the extent of 14-15% of Japan’s GDP. KIE estimates a $1.7-trillion increase in the balance sheets of G-4 central banks by the end of 2016.
The brokerage believes that the ‘net’ increase in global liquidity is likely to act as a buffer against any Fed tightening in 2015. Thus, global investors will continue to hunt for attractive ‘carry’ among EMs, albeit selectively.
It, however, argues that EMs will have to continue to push for structural re-balancing for low-risk premiums, while real rates will have to remain high enough for an attractive ‘carry’.
KIE believes that India’s improving macro-economic parameters and reforms momentum will allow RBI adequate room to adopt a softer monetary stance. As a result, India’s attraction as a debt market for foreign investors will be enhanced if interest rates decline over the next 12-18 months.
India has received an unexpected boost in its fight against high CAD, fiscal deficit and inflation from the recent fall in global crude oil prices. “India will gain from the emerging global scenario if it continues to pursue the right policy mix,” argues Kotak.