Menu
4 min read
The West Asia conflict might now be over in its shock impact, with crude oil and other input prices now coming lower – though the shock itself has likely impacted global growth, implying slower and more limited global rate hikes but still a smaller degree of fiscal dominance. For India, developments have led to a lower inflation forecast closer to 5%, and consequently rates pricing only to a hike towards neutral amid muted INR risks. Fresh risks are emerging through the monsoon so far amid strong El-Nino trends. Despite high foodgrain stocks and water storage, risks to both inflation and growth are watched for.
After weathering the West Asia storm, climate risks ahead
The Indian economy entered the West Asia conflict strong, with high-frequency indicators showing resilience even though a few sectors have been hit. With energy price conditions normalising, inflation projections now seem lower, pushing back on aggressive rate hikes, and also allow the INR to stabilise at what now appears to be close to fair value. The RBI steps are likely to create short-term benefits to FX reserves and liquidity, but unless intervention stops, these benefits will likely fade. If not, liquidity will likely need to be durably tightened through OMO sales or a CRR hike, which hit an already-weak rates market – continuing to push for alignment with higher global neutrals and term premium. This is even before a new risk – from El-Nino appears. Weak monsoon conditions can lead to higher inflation and weaker rural growth despite high food and water stocks, affecting rates and the INR as well.
Global fiscal expansion, rate suppression postponed:
Despite optimism on a global recovery with the end of the West Asia conflict, growth is not as strong as appears cross countries (please see details and appendices). This is likely to diminish pressure for rate hikes towards neutral as well as on currencies, which in the case of the JPY and the USD were weaker given expectations of interest rate suppression and fiscal dominance. Fiscal drivers remain strong, but with still-mixed growth conditions, this lowers the extent of fiscal dominance in the near term, affecting steepness of rate curves. While the overall view remains of a steeper curve and weakness in USD and JPY given lower savings amid higher defence spending, the path to these now seems longer than initially thought.
To read the full report Click Here
