How central bank actions will influence your market moves
By DK Aggarwal
Global investors are prepared for a coordinated tightening of monetary policy by the worlds major central banks. The global economy continues to enjoy its best health, with both emerging markets and advanced economies reporting stronger growth.
The aligned global economic recovery is now motivating inflationary prospects, driving major central banks to move slowly towards interest rates tightening. However, ongoing geopolitical uncertainties and trade issues have dampened investor enthusiasm across the globe. The US Federal Reserve has already started its task of raising rates, and others are likely to join the bandwagon soon.
The European Central Bank is set to end its bond purchase programme by year-end and recently it cleared its stance regarding rate hike. With interest rates still unusually low and central banks balance sheets bloated, most global central banks have stood by their accommodative stances, except the Fed. At its recent meeting, the Fed raised policy rates by 25 basis points and projected one more hike before the end of the year and three in 2019, dropping the word accommodative from its statements.
This was the eighth increase since the Fed began normalising policy in December 2015. Besides, the Fed depicted economic conditions as strong. Tax cuts initiated by the Trump government are supporting consumer spending and boosting profitability of US companies.
Back at home, the Reserve Bank of India is scheduled to meet on October 4 and 5 to discuss money policy. A weaker rupee followed by three rate hikes from the US Fed and soaring crude prices may tempt the Indian central bank to go for a rate hike. The domestic currency has tumbled nearly 15 per cent since the start of the year and has become the worst-performing currency. Prices of crude oil have surged 20 per cent this year, resulting in swelling of the current account gap to 2.4 per cent in the April-June quarter of 2018-19 against 2.5 per cent in the year-ago period.
Undoubtedly, the current account deficit is rising and global financial conditions have tightened through April till July. Since April, RBI is believed to have spent $20-25 billion forex reserve to protect the rupee; yet the domestic currency has continued to weaken.
Obviously, this will be a concern for policymakers. Still, a sharp fall in the rupee has not stirred much worry about inflation, which was remained under 3.7 per cent in August, slightly below RBI's 4 per cent target. Also the escalating US-China trade war has not had any major impact on India.
Meanwhile, the Indian economy is doing well and it is expected that it would expand at an annual rate of more than 7 per cent every quarter over next two years. At a time when the domestic stock market has been spooked by talks of liquidity crisis, especially in the aftermath of IL&FS' rising debt, it is expected that RBI will come up with a policy that would support the sentiments of both domestic markets as well as foreign investors.
Investors looking for good long-term investment opportunities may consider going long amid the ongoing market disruptions. But one must do rigorous homework on quality stocks before buying them. The long-term outlook of the Indian economy is pretty good and it is expected that India will continue to remain the world's fastest growing major economy.