Moneycontrol Pro Panorama | Horses for courses

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Dear Reader,

Nothing makes markets go as central bankers playing the fiddle of rate cuts can. Last month, it was the US Federal Reserve that mesmerised markets with a 50 basis points cut in the Fed funds rate. This week, when the going got tough for Indian markets, from the stables of the Reserve Bank of India (RBI) came a breath of fresh air.

The monetary policy committee did not want to horse around with the policy stance anymore and voted to change it to neutral from withdrawal of accommodation. The markets took it as a bell that has rung on the racecourse and both the Nifty and the Sensex forgot all about the war brewing in the Middle East, at least for one sweet session. Since then, rate cuts are not an if but a when. The fierce debate is whether the RBI will cut in December or hold until February.

Several analysts believe that a December rate cut is not a done deal (the reasons are here and here) because inflation is a wild horse. What was an elephant in the room a few months back, is now a horse locked in the stable, if Governor Shaktikanta Das is to be believed. But do not mistake this for a softening tone from the RBI.

Das was clear that he does not want the horse to bolt out of the stable again and run amok. That would be a disaster for the central bank and the economy. We all need to recollect the episode where inflation became the trojan horse for US Fed chief Jay Powell when he brushed it off as transient. “We must keep the horse under tight leash so that we do not lose control,” said Das. Our Chart of the day details the two big factors that is bothering the RBI.

But bond markets do not want to look at this gift horse in the mouth and are readying for a long profitable journey. Yields, already down. are poised to fall more. A basis point is one hundredth of a percentage point. Fund managers are prescribing long-duration funds to make the most of an easing interest rate cycle. But are markets running ahead of themselves?

A 50 basis points cut in the repo rate by end of FY25 seems to be the most expected in the market. Rate cuts mean lower interest rates on borrowings and therefore, higher profits. But Ananya Roy explains it is not as simple as that. “Due to factors including lags in transmission of rate changes, historical evidence suggests that periods of rate cuts tend to be accompanied by corrections in stock markets,” she points out in her column. Will the new investors into stock market who have only seen highs, stick around during lows? Is the bullishness underpinning the markets as strong as a horse?

A policy rate cut surely would not be the biggest swing factor. The earnings season has begun, and investors should look for what company chief executives expect in the second half of this year. Would it be the same wariness seen in previous quarters or will they share the animal spirits of Governor Das when it comes to growth?

There is also the dragon at the gates: China. Beijing’s stimulus has been the single biggest factor to lure investments from India back to China. The finance minister there is scheduled to detail new fiscal spending plan. Whether there is more stimulus coming or not, Beijing markets know that the government is now committed to beefing up growth. As this Financial Times piece, free to read for Moneycontrol Pro subscribers, points out Xi Jinping’s strategic motivation has not changed. The Chinese President wants an economy built on technology, free from the influence of the US, and that remains.

What does this mean for India? When elephants fight, the grass suffers. Of course, we are no grass, but there is really no place for tigers either in a pachyderm fight. How the Chinese economic prospects fare in the medium term and how fragmented the world gets due to the two ongoing wars will deeply influence India’s prospects as well. The US Fed’s approach towards policy rates, no doubt, would influence investment flows and in turn India’s growth. Central bankers may not be horses for courses, but the economies they serve and the markets they regulate most definitely are.

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Aparna Iyer
Moneycontrol Pro