The Reserve Bank of India (RBI) is likely to take cues from its global counterparts, including the US Federal Reserve, to raise interest rate for the fourth time in a row on Friday to tame stubborn inflation.
The MPC, headed by RBI Governor Shaktikanta Das, is scheduled to meet during September 28-30. The decision will be announced on Friday (September 30). As per experts, the RBI is likely to go for a 50-bps increase in repo rate which will take it to 5.9 percent.
However, according to analysts at brokerage house Emkay Wealth believes that aggressive rate hikes could prove counterproductive in the short run.
“Inflation has become a concern for most major economies, and the central banks are resorting to aggressive rate hikes. This move could push up inflationary pressures, proving counterproductive in the short run. The Dollar index and crude are the two key indicators to watch out for the next few quarters," said Joseph K Thomas, Head of Research, Emkay Wealth Management.
The brokerage noted that the post-pandemic years witnessed a relentless rally across the world market fuelled primarily by easy monetary policies by global central banks. However, the second half of CY22 saw a sharp correction in the West, a lower than expected correction for the Indian markets, the brokerage pointed out.
According to Emkay, the easy monetary policy caused inflation to shoot up to a level never seen in decades, this resulted in rate hikes and a reversal of excess liquidity and this move caused a correction in equities and sharp depreciation of currencies vs the dollar.
Amid a spike in US bond yields, the rupee on Wednesday, September 28, ended at a fresh record low of 81.94 against the US dollar. The domestic currency has already depreciated around 9 percent against the greenback so far in the calendar year 2022.
But as the inflation shot up, the central banks also went on a rate hike spree. In a third straight increase in interest rate, the US Federal Reserve hiked the policy interest rate by 75 basis points. The Fed action put the global equities markets in the red and India is no exception.
The RBI had also raised repo rates by 50 basis points each in June and August after raising the short-term lending rate by 40 basis points in an off-cycle decision in May. Since May, the RBI has raised the repo rate by 140 basis points (bps).
On the aspect of market and fund flows, the road ahead will be a lot different than the previous two years, predicts the brokerage. Geo-political tensions, spikes in crude prices, and concerns around recession in the developed markets are some of the major risks to markets, it cautioned. While there is no major risk to the domestic economy, there are some risks of exports slowing down and currency depreciation, noted Emkay.
With respect to asset allocation, the brokerage strongly believes prudent asset allocation diversification can help create long-term wealth for investors. While diversification across asset classes and equity markets is important, investors should look at Indian manufacturing as a key theme for investment as we witness the China+1 strategy unfolding post the pandemic, it advised.
Vishal Amarnani, Head of Fixed Income, Emkay Wealth Management said, “We are witnessing fund flows to fixed income and debt due to the rising rates, also a wider belief that rate will scale higher from here. The system liquidity is in a deficit of over ₹21,800 crore, this along with the delay of inclusion of Indian bonds in the global bond index has also led to a rise in the government securities yields. The benchmark yield is back to 7.40-7.50 levels as expected. However, yields for long fixed-income instruments have increased and seem attractive in the near to mid-term.”