Talking Points This Week: Gloom, Doom Or Kaboom?

Over 90 central banks have raised interest rates this year, with half of them hiking by at least 75 basis points in one shot. This week, Sweden at 100 basis points and the Swiss National Bank and the U.S. Federal Reserve at 75 basis points were the big ones. It had its impact on the markets as well, with global stocks declining for the fourth straight week. The question is whether the recovery seen post mid-July will now be sold into, as winter nears and rates and uncertainty around geopolitics rise. And from India's perspective, the RBI's decision next week assumes great significance. Here are the key talking points this week.

The FOMC announcement of a 75-basis-point rate hike to 3.0-3.25% was in line with broader expectations. While the Fed dodged the rising expectation of a full 100 basis points, its guidance turned out to be highly restrictive. The most important part of the announcement was the revised summary of economic projections, which guides for a higher rate trajectory and the emphatic preclusion of rate easing even till the end of 2024. The terminal rate is seen at 4.6% for 2023 and a cumulative additional hike of 150 basis points before the end of 2022, or 100 basis points higher than the Jun 2022 projections. Hence, we are looking at one 75-basis-point hike before the year turns. The Fed chair has reiterated the central bank’s motive to remain firmly committed to his commentary in the Jackson Hole speech. From a risk asset getting relief perspective, the one silver lining was what Chris Wood pointed out in his Greed and Fear note.

Soaring borrowing costs are squeezing homebuyers and property owners across the world. A Bloomberg piece noted that from Sydney to Stockholm to Seattle, buyers are pulling back as central banks raise interest rates at the fastest pace in decades, sending house prices falling. And millions of people who borrowed cheaply to purchase homes during the pandemic boom face higher payments as loans reset. India's numbers are looking slightly different. While September, due to the Shraadh period, the monthly registrations might be weak, the first five months have each held a record of either sales or registrations in various markets. Remember, Mumbai's August registrations were at a decadal high. And every single real estate company talks about the consolidation story while explaining the reason for the high development pipeline and robust growth projections.

Accenture's Q4FY22 revenue growth of 22% year-on-year suggests strong growth for Indian IT firms in Q2FY23, according to Jefferies. However, Jefferies adds that a rising focus on cost optimisation, weaker hiring, and soft FY23 revenue growth guidance of 8-11% year-on-year suggests that some caution is starting to creep in. ACN noted that certain industries are facing a higher impact from inflation and are re-prioritising spending towards cost initiatives. Will this show up in the commentaries of IT companies is the key question. Do note that the sector is reeling under pressure from the drawdown of the Nasdaq (down 7% in the last one month), as well as the ownership of FIIs, which have largely been in the sell mode in 2022.

The Reserve Bank of India is expected to hike rates by 35–50 basis points next week. The central bank, aside from the rate decision, is also expected to tackle the issue of liquidity, with banking liquidity slipping into deficit after a period of 40 months. And while there's the usual debate over the trade-off between growth and inflation, JPMorgan's Jahangir Aziz believes that that trade-off is false and that’s not where the RBI or monetary policy should be focused on right now. On the sidelines of the JPMorgan India Investor Summit, he told BQ Prime that while "we are all debating about whether inflation is the problem or growth is the problem, one needs to look at the old problem of India’s twin deficits, which has always been India’s Achilles’ heel". With CAD hitting 4% of the GDP, Aziz said, "The last time we had this combination was back in 2013. Where a whisper that the Fed would tighten monetary policy created the taper tantrum, the Fed now is doing quantitative easing and is raising rates."

Will the global markets and the RBI next week spell gloom or doom? Or would it be a loud explosion—Kaboom? We await with bated breath.

Niraj Shah is executive editor at BQ Prime.