Amid a slightly hawkish tone by both the major global central banks, market participants now shift their focus on the Reserve Bank of India’s (RBI) upcoming monetary policy next month.
The European Central Bank (ECB), on Thursday, raised interest rates by 25 bps to its highest level since 2001 to 3.75%. This was a day after the US Federal Reserve resumed its rate hike on July 26, marking its 11th rate increase.
The Federal Open Market Committee (FOMC) raised the benchmark funds rate by 25 basis points (bps) to a range of 5.25% – 5.5%, which is its 22-year high level.
Also Read: Hawkish to dovish: Fed softens, RBI contemplates
With the RBI keeping the repo rates unchanged at 6.5% in its last two policies, the interest rate differential between India and the US has narrowed down to just 100 basis points. One basis point is 0.01%.
Economists, however, do not expect India’s central bank to change interest rates or even stance in the next policy meet scheduled during August 8-10, 2023.
“The RBI may not change interest rates in the upcoming monetary policy meeting. However, the central bank may raise its inflation forecast marginally for the next quarter,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services.
Moreover, with domestic inflation likely to stay elevated in the near future, economists expect rate cuts by the RBI to be pushed to next fiscal year.
“We expect a repo rate cut by RBI in early FY25,” Arora added.
India’s consumer price index (CPI) inflation rose from 4.31% in May to 4.81% in June, higher than expected due to a surge in vegetable prices. Food inflation spiked to 4.49% last month. RBI forecast FY24 CPI inflation to be at 5.1%.
Meanwhile, curiosity also remains over RBI’s stance as the minutes of the last policy meeting shows the Governor Shaktikanta Das-led Monetary Policy Committee (MPC) members appeared increasingly divergent in their views on the future course of rate hikes, with some external members arguing that further tightening could hamper the economic recovery.
“I find that with every successive meeting, this stance is becoming more and more disconnected from reality,” external member Jayant Varma wrote in the minutes adding, “The monetary policy is now dangerously close to levels at which it can inflict significant damage to the economy. Despite this, the majority of the MPC wishes to remain focused on withdrawal of accommodation whatever that phrase might mean.”
Just as the global financial markets were adjusting to the Fed’s rate hike, another jolt came in from the other side of the world when the Bank of Japan (BOJ) on Friday announced steps to make its yield curve control policy more “flexible”.
In another step on the way to policy normalization, BOJ raised the upper limit for the fixed rate operations and said it will offer to buy 10-year Japanese government bonds (JGB) at 1.0% in fixed-rate operations, instead of the previous rate of 0.5%.
Read here: Bank of Japan holds interest rates, makes yield curve control policy more flexible
The move lifted Japan’s benchmark bond yield to a nine-year high. The 10-year JGB yield spiked as much as 13.5 bps to 0.575% for the first time since September 2014.
The yen also extended gains against the US dollar and was up as much as 1.05% at 138.05.
BOJ’s decision triggered selling in Asia’s risky assets, the impact of which was seen in domestic equities as well.
“Bank Of Japan’s policy stance worried investors all over. The move raised expectations of the redemption of Japanese cash invested everywhere and flowing out of global markets,” said Sudip Bandyopadhyay, Group Chairman, Inditrade Capital.
He believes these developments have led to a risk-aversion in the markets.
However, Bandyopadhyay expects the Indian market to remain attractive and going ahead will be guided more by domestic factors such as corporate results and government policies.
The recent fall in the domestic market can be utilised to buy good quality stocks, he said.
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Updated: 28 Jul 2023, 05:29 PM IST