Moneycontrol Pro Panorama | What relief rally?

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The US Federal Reserve’s mega 75 basis points (bps) rate hike announced on Wednesday was the biggest in nearly 30 years. Yet, it was not surprising, given the imminent need to tame inflation, which is rising at its fastest pace in 40 years in the US.

The puzzling question, however, is how much is enough to cool spiralling prices?

Given sticky inflation data, Fed chair Jerome Powell’s salvos are likely to continue through the year with another 50 bps or 75 bps hike in July. Working backwards from the Federal Open Market Committee’s forecast of the Fed Funds rate touching 3.4 per cent by this year end (2022), there could be 50 bps rate hikes in each of the four Fed meetings this year, points out MC Pro’s research analyst Anubhav Sahu in this article.

While policymakers seem confident that the US economy is well-positioned to deal with higher interest rates, much of the inflation is fanned mainly by high energy and commodity prices due to supply constraints precipitated by the Russia-Ukraine war, about which no central bank has any control.

In fact, inflation fears have engulfed most nations. According to American think tank Pew Research Center, in 37 of the 44 nations studied, the average annual inflation rate in the first quarter of this year was at least twice what it was in the first quarter of 2020, as COVID-19 was beginning its deadly spread. In 16 countries, first-quarter inflation was more than four times the level of two years earlier.

While US and Asian markets seem unscathed by Powell’s aggressive hikes, in India, the relief rally seen early in the day started fizzling by noon. Although it is now certain that most central banks, including the Reserve Bank of India, may try to get in front of the curve, high interest rates could also see some economies slowing down.

Rating agency ICRA in its latest Business Activity Monitor, an index of high frequency economic indicators, signalled tepid momentum in economic activity in May 2022, amid the geopolitical headwinds. It expects uneven economic growth with services consumption prioritised and high inflation to eat into the demand for discretionary goods.

Sure, Indian indices have fallen on the back of strong selling by foreign institutional investors in the past few months. This may have taken away some froth from valuations but, bear in mind that there haven’t been significant earnings downgrades yet. Pankaj Tibrewal, senior VP & fund manager (equity) at Kotak Mahindra AMC, writes in this piece that the third stage of market fall — a downturn in the economy and earnings downgrades — is yet to play out.

Investing insights from our research team

City Union Bank: Faster loan pick-up, asset quality comfort will drive rerating

Va Tech Wabag: Business takes a pause, valuation offers a bargain

What else are we reading?

Chart of the Day | The last time US financial conditions were this tight is in May 2020

Why is gold not acting as a safe haven?

LIC’s IPO woes began long before its listing

Large hospitals driving recovery in healthcare sector

Crypto Conversations | ERC-1155: Why this Ethereum standard is special

Why we trust fraudsters (republished from the FT)

Has Pakistan given China a carte blanche to plunder Gilgit-Baltistan?

And, in Start-up Street

Start-up Street: After a blip, fintech is back to pole position for VC funds
Technical Picks: Crude oil, USD-INR, ITC, Coal India, Piramal Enterprises and JK Infra (These are published every trading day before markets open and can be read on the app)

Vatsala KamatMoneycontrol Pro