– By Sunil Damania
The global stock market has rallied in anticipation that central banks worldwide will start cutting interest rates soon. This expectation started in the last quarter of 2023. When 2024 began, there was an expectation that the Fed would do rate cuts seven times in 2024, and that number started coming down as the year progressed. A few weeks back, it was expected that there would be three rate cuts from the Fed in 2024, with the first-rate cut happening in the June FOMC meeting. Now, the market is also factoring in no rate cuts in 2024. That hypothesis got some credence when, on 4th April, 2024, Minneapolis Federal Reserve president Neel Kashkari made a statement of no rate cuts in 2024. He is the first Fed official to make a statement like this.
While in India, we expected RBI to do a rate cut just before the election to lift the nation’s mood. But RBI decided to maintain the status quo as the Inflation trajectory is uncertain. In his speech, RBI Guv stated that the “last mile of disinflation is turning out to be challenging.” It’s becoming challenging due to a potential spike in food inflation. The price of crude as well as crude has moved up in 2024. These can disturb the calculation. The geo-political situation continues to pose a risk to the supply-side shocks, which can further push prices higher. RBI does not want to take a chance of moving a little ahead of the curve to cut interest rates.
If the economy is not doing well, then rate cuts become necessary and urgent. But the local and global economy continue to show a lot of strength. India’s GDP growth has been revised upward not only by Indians but also by global agencies, showing that without an interest rate cut, India can sustain its growth. The global PMI data for the March month was at nine-months high at 52.3 showing that the Global economy’s health is improving. India’s merchandise exports have gone up three months in a row. Many US retailers restocking inventory, suggesting that merchandise exports of India will continue their upward trajectory.
So, global price uncertainty and strong global growth make a good case for RBI not to reduce the repo rate. We must wait longer for an interest rate cut from the RBI. In today’s speech, the RBI governor said: “Two years ago, around this time, when CPI inflation had peaked at 7.8 per cent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest.”
Looking at the various data points, the elephant may remain with us longer than one would like. This reminds me of the famous Rajesh Khanna movie- “Haathi mere saathi”. Learn to live together with the elephant for more time.
(Sunil Damania is the Chief Investment Officer at MojoPMS.)
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