2021-11-10 23:18:00
What did you make of the bond yield rise that we have seen? What is it signalling at a time when we keep discussing whether inflation is transitory or structural?
The messaging here is clear. The markets are becoming more and more sceptical of the Fed’s and other major central bank’s stance on inflation being transitory. The fact that the whole of the US yield curve moved higher yesterday highlighted such concerns and clearly the dollar has rallied against EM currencies. It is not just US inflation but we also have outside gains in Chinese inflation data yesterday, especially the PPI.
The messaging from the central bank is becoming increasingly tested by the market and there is clearly a lot of uncertainty about the persistence of inflation. Until then, what it means is that one has got a relatively flatter yield curve. There is continued uncertainty, volatility in rates and to some extent it may also add an element of risk aversion to markets after really strong gains in risk assets in recent weeks.
Fed tapering is expected soon. How is it all going to impact flows? India has been a big recipient of the foreign flows through our domestic flows are pretty solid?
Tapering is not a huge issue for markets. We have known for some time the Fed is going to embark on tapering and that it will continue at a pace of $15 billion a month, ending in June next year. That is really not going to be a major concern. The real question mark here is when the Fed starts hiking interest rates. We have already had market expectations move fairly sharply towards hiking close after tapering finishes. That is aggressively hawkish compared to our expectations that the Fed only starts hiking at the end of 2023. This is going to be an issue for emerging market and capital flows.
India has been a major beneficiary of capital flows — both FDI and portfolio — especially in equity markets. That has receded more recently in equities. Now, there may be an element of profit taking but we are still pretty constructive on India and the growth story and capital flows to India next year. But clearly there are going to be obstacles as US market rates move higher as the markets price in Fed rate hikes as inflation continues to remain persistently high. That does cause a problem for a lot of emerging markets and especially for India if oil prices continue to move higher as well. It could be a big problem for India’s trade, in current account deficits and a potential pressure on the rupee as well is seen.