RBI may raise repo rate by 50bps this year: JPMorgan
What's the story
JPMorgan has predicted that the Reserve Bank of India (RBI) could raise interest rates by a total of 50 basis points (bps) by December. The forecast comes from Chief India Economist Sajjid Chinoy, who anticipates two rate hikes, one of 25 bps each in October and December. The prediction is based on rising inflationary pressures due to factors like higher crude prices, a weaker rupee, and persistent core inflation.
Rate discomfort
Negative real rates
Chinoy said, "To level-set policy rates in an environment where inflation is going to be upwards of 5.5% for the next three quarters, the RBI may be uncomfortable keeping negative real rates in this kind of environment."
His comments suggest that if inflation stays high, the RBI might not want to keep interest rates lower than the rate of inflation.
Market analysis
Indian markets caught between two forces
Indian equities are caught in a tug-of-war between resilient domestic earnings and heavy global macro headwinds, according to Sanjay Mookim, Head of India Equity Research at JPMorgan.
Mookim pointed out that while bottom-up company fundamentals remain solid, rising crude oil prices and elevated bond yields continue to test market resilience.
He cautioned that foreign institutional inflows are likely to remain subdued if global interest rates hold high and the US dollar strengthens.
Investor sentiment
AI's impact on relative growth trends
Mookim also touched on the impact of artificial intelligence (AI) on market performance.
He said that relative growth trends are crucial for equity markets, currencies, and flows.
While AI is attracting a lot of attention, it is also boosting growth in other parts of the world.
This relative growth does not favor India at present, which could explain why foreign portfolio investors (FPIs) are not turning to Indian markets yet.
Yield effects
Rising US bond yields and BOJ's rate hike path
Chinoy highlighted the impact of rising US bond yields, which are at a 19-year high, and Japan's Bank of Japan (BOJ) on a rate-hiking path.
He said these factors remind him of 2022 when there was synchronized monetary tightening and higher crude prices.
However, he noted that the current situation is not as strong as back then due to resilient growth in developed markets.
Inflation concerns
Developed market central banks' rate hike expectations
Chinoy said core inflation is sticky due to resilient growth.
However, he criticized the fiscal policy in developed countries as irresponsibly pro-cyclical, leading to widening fiscal deficits from the US to Japan.
This combination has led to rising bond yields.
He expects seven of the eight developed-market central banks JPMorgan tracks will hike rates before this year ends, indicating a coordinated cycle similar to 2022 but not as stark.