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Long term macro shifts around savings, neutral rates, market segmentations, and fiscal dominance we have been writing about have moved from gradual to sudden moves. With the multidimensional shock of the Iran war, degrees of freedom on policy have been trimmed, resulting in a faster tightening of conditions and closing off of the period of supernormal growth domestically. With this, a lower long-term growth level might also need to be countenanced, especially as developments translate to higher neutral rates, term premium and lower availability of inputs, capital and knowhow on a global level.
Gradual macro shifts catalysed by West Asia developments
Global shifts we have been writing about around segmentation of value chains, capital flows, the balance of savings, and fiscal dominance, all ultimately driven by geopolitics were in the background over the past few years. We have for a long time written about these, seeing changes as over the long term. However, the Iran war has catalysed these developments – global neutral rates are higher again, finance is being drawn from high-savings countries, global investments have slowed down, and the US and Japan are already in fiscal dominance territory. As in the past, this drives a segmented world with the law of one price no longer applying.
India: Tolerating a lower growth equilibrium in the medium term
The global shock is across dimensions, even with an uncertain temporary ceasefire. This is seen hurting availability of inputs around energy, construction materials, metals, fertilisers, etc., while at the same time raising prices of inputs that are linked to global prices. Developments raise inflation, with faster convergence of India neutral rates to global levels, reducing the extent of above-trend growth that was hitherto possible. This comes with higher rates and continued pressures on the INR, while confidence indicators are also weaker. Developments force a revision lower of expected medium term growth.
Global: Higher for longer in fiscal, rates
The mix of high defence spending, reduced savings, segmented capital markets, political fluidity, and generalised uncertainty has raised both neutral rates and term premium, perhaps to levels seen before the end of the Cold War. Higher for longer has been a catchphrase for some time, but is now likely to ring true across metrics of global fiscal trends, inflation and rates.
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