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Hot inflation and tense international relations have jolted the global economy, prompting other banks controlled by the centre to follow the Federal Reserve of the USA in boosting interest rates. With a rate hike of 0.75 %, the Fed established a new normal of 3 % up to 3.25 %. That’s a rise from ‘nothing’ at the beginning of the year and the fifth increase so far this year. According to analysts of the market, RBI is expected to implement a significant rate hike in the coming week. Most market players anticipate a rate hike of 35-50 bps from the RBI when it makes its policy decision on September 30.
Key Takeaways
- RBI is scheduled to publish its policy decision on September 30, and the vast majority of market investors are anticipating a rate increase of fifty basis points.
- Since the global economy has been shaken by soaring inflation and heightened geopolitical tensions, more central banks have been forced to raise interest rates alongside the Federal Reserve in the United States.
- The Federal Reserve raised interest rates by 0.75% on Wednesday, bringing the range of possible rates to between 3% and 3.25%.
- This marks the seventh increase in rates implemented in 2018, with those rates beginning the year at zero.
Overview of the Economists
Based on the opinions of ICICI Securities’s economic experts, the RBI may increase its rate of policy by extra 50 bps at its meeting related to policy at the end of this ongoing month and by an additional 25 basis points at its December meeting, bringing the total upto 6.15%. According to the local brokerage, the cumulative effect of this year’s monetary tightening will reduce headline inflation of CPI to under 6% Year-on-Year on November 22 and even beyond that.
According to Nandan Pradhan, deputy general manager, treasury, at Cosmos Bank, “the Indian narrative of the terminal repo rate all of a sudden has switched upto 6.50% from 6.00% in an interval of days, resulting to undue the pressure of selling as the yields of bond were adjusted.”
The supply-side effects of inflation are still a worry. The Sino-American tussle and changing geopolitical circumstances surrounding the Russian-Ukrainian conflict are also alarming signs. Vivek Iyer, leader, and partner at Grant Thornton Bharat predicted a 35-50 basis point rise from the MPC.
Since the Federal Reserve and other central banks continue tightening their monetary policy, Mr. Sumant Sinha, president of ASSOCHAM has stated that an increase of 35-50 basis points in the rates of benchmark stock looks inevitable. However, he did point out that the activity of economics is brisk. Growth is being spurred on from all directions, and currently, inflation is manageable, putting India in a golden situation. The economy will benefit from a drop in petroleum prices, and rate reductions can begin in the first quarter of FY24
He suggested, among other things, that sustainability be included in the scope of the loans in the priority sector, as this is the only way to ensure that sustainable projects benefit from bond issuances( free of tax), reduced capital charges, and reduced provisioning.
“Although the corporate sector would prefer lower rates of interest, the major problem and the goal is to combat inflation head-to-head in such a way that we have sustainable growth,” said Mr. Deepak Sood, the chamber’s secretary general. As he put it, fiscal stimulus may prove helpful in the fight against inflation, and the RBI’s monetary involvement shouldn’t lead to deflation.
The Extent of the Impact on the Investments
According to analysts of the market, the continuous increase in the interest rates of the USA, threatens the stock market of India. Still, it also gives a chance for international investors to spread their money worldwide. Although hiking rates of interest disadvantage Indian shares, a healthy domestic demand environment offers some promise to international investors.
According to Edelweiss MF’s Chief Investment Officer for Equities, Trideep Bhattacharya, “we remain optimistic on the equities of India particularly on the medium-term and carry on to concentrate on our portfolio’s local cyclical, which carries on to seem good to us from a perspective of medium-term.”
The Trend of Price Increases
According to Deutsche Bank, India’s headline inflation of retail is anticipated to reach a high within five months in September at 7.4%, including the possibility of rising further if the boost of vegetable and food price increases continues to ramp up over the remaining of the month. Based on our exercise of nowcasting, we estimate that inflation of CPI will come in at 7.4% year over year in September, up from 7.0% year over year in August, as stated in a note dated September 20 by Kaushik Das, the chief Indian economist.
Initiatives from the Chamber
The chamber has delivered a note in detail to the Reserve Bank of India in preparation for the upcoming review of the credit policy, claiming that India is in a better position in front of inflation than Advanced Economies, that are experiencing higher inflation because of the energy shortages and issues from the supply side on labour, particularly in Europe. More specifically, the chamber advocated for the MSMEs to maintain the NPA classification standards established before the onset of the Corona pandemic.
Despite being reclassified as Non-Performing Assets (NPAs) because of the slowdown preceding the pandemic, MSMEs now suffer difficulties as a result of the aftermath of the disaster. Therefore, we advocate for a temporary easing of Income Recognition and Asset Classification (IRAC) criteria for Micro, Small, and Medium-Sized Enterprise (MSME) units labelled Non Performing but still in business. ASSOCHAM recommended a variety of tax breaks, including those for retirees and others, to increase retail investment in Government securities.
