Sunday, March 26, 2023

Welcome to The Weekly, where our team shares a few thoughts to take you into the week. This week’s thoughts have been brought to you by Sagar Lele, Founder of Rupeeting. He also manages the All-Weather portfolios.

Another Rate Hike Coming? 🔺

The RBI is set to meet again between April 3 and April 6. Will it hike rates again?

Globally, central banks have been walking on a tightrope. Hike rates and risk a system-wide banking failure. Don’t hike, and risk inflation going even higher. So far, taming inflation seems to be the default choice; along with extending support to banks at parallel.

• Last week, the Fed increased rates by 25 bps, even after the failure of three banks, and two more being at risk
• In the week before that, the ECB too raised rates by 50 bps, despite all the drama at Credit Suisse

In the Indian context, the RBI has a lot more room compared to the tight corners that the Fed and ECB are pushed into.

• India is still likely to grow at 7% in FY23 and turn out to be the fastest growing in the world
• India’s inflation in February was at 6.4%, which is a tad higher than the comfort range of 4% +/-2%; unlike somewhere like the UK, where inflation is at 10.4% versus a comfort level of 2%

This makes the probability of a rate hike quite strong. Valid reasons to do that include:

1. Inflation is still higher than the comfort zone
2. High inflation is being driven by food, which faces threats of not easing because of continued supply issues, and the current heatwave which may impact yields of the rabi crop
3. With strong domestic demand and a stable banking crisis, India doesn’t face pressures like the global economies

<aside> 💡 In short, a rate hike may be needed, and the RBI can very well afford to deliver one.

</aside>

What happens to the market? With so many reasons available, this is an easy one to justify - continued downward pressure! Many reasons - worsening global outlook, weakening exports, currency depreciation, foreign funds outflow, high food inflation, more rate hikes, and higher risk aversion.

Idea - Nykaa 💄