The RBI has raised rates aggressively to tackle inflation that has remained well above their target band of 2%-6%. Further tightening could pose risks to economic growth, particularly given the lags with which monetary policy acts.
The urgency shown by the RBI to bring inflation down to 5% or below is high. They are hoping that the tightening already underway will be adequate.Further, it should be noted that India's inflation is lower than several advanced economies for the first time in a very long time.
But once it (inflation) has come down below 5%, then how quickly you bring it further down to below 4% is really a question of risk-reward. We should accept the growth sacrifice to bring it down to below 5%, but we should be wary of excessive growth sacrifice to do the next round of 5% to 4%,"
Monetary policy Committee Member
The RBI would prefer the repo rate being held close to 6% for several quarters until inflation is stamped out.
A double whammy of Rupee depreciation and high inflation have been the pain points of late. But, is the Rupee really weakening or the Dollar strengthening?
Either way, how does it impact the Inflation?
The current fall in the rupee has been on account of the sharp gains in the dollar globally and not on account of India's economic fundamentals. High interest rate in the US is attracting investors across the globe to invest in the US G-Sec and as a result, demand for the US Dollar has gone up drastically.
Imports are impacted due to Rupee losing its value whereas; exports are getting benefited. As a result there is not much inflationary pass-through from the exchange rate.
Further, the Dollar Index is at the highest level since Jan-2002, however, experts are of the view that it may not breach the previous high of 120. There would be an economic unrest globally if it moves above 120. The Euro has 60% weightage on DXY. If there are further rate hikes in Euro Zone as promised, DXY may not move up further. But, we need to wait and watch how the internal politics of Euro Zone would play out. Historically, correction from the peak in Dollar Index has been favorable for emerging markets. However, the correction from current level may not come faster.
Blockquote: While the USD/INR has gone up more than 4% in the past month, it may find resistance at 85 and we could see a normalization at 77-78 once global central banks start easing their economies.
Head, Product Development & Strategy,
ICICI Pru. MF
We are of the view that these macro conditions will keep the market volatile for the next 9-12 months, maybe even correcting by 10%-15% at any time. It is impossible to time the market, and no one can predict when the market will bottom out. However, every sharp dip is an opportunity to add into equity and we are also adding lump sum cash during sharp corrections.
We suggest you remain invested and continue your systematic investments through SIPs and STPs as it is. In case of lumpsum investment, do it in multiple tranches. Rising interest rates provide an opportunity to invest in debt instruments for regular cash flows as well as diversification in the portfolio.
And as the Gsec yield is moving up, one can start investing in long-term debt instruments but in multiple tranches. RBI’s Retail Direct Account is an ideal route to invest in Gsec directly.