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The Rate Update 💡

Earlier this month, the RBI had left rates unchanged at 6.5%. And last week, it was the Fed that paused on its hikes. However, both the central banks maintained that curbing inflation was of priority, and that further rate hikes couldn’t be ruled out despite the pause. And while India and US have hit the pause button, two opposing rate decisions have come in during the last week - one from the EU and one from China.

A rate hike

The ECB raised rates by 25 bps last week to 3.5%. Despite the cumulative 400 bps hike in the last year, the ECB is far behind the 500 bps that the Fed raised. And while Fed’s worries have moved beyond inflation and towards the economy, the ECB is still worrying about its stubbornly high inflation. Despite having pulled some major economies down, plugging off the hikes may still be a while away for the ECB.

And a rate cut

On the other hand, China’s central bank cut a key policy rate - on its medium term lending facility. Earlier last week, it had cut its repo rate. These efforts are aligned towards giving the economy a push, which hasn’t come out of its three year long COVID slumber very well. Expectations of a strong rebound have been dampening after indicators like retail sales and industrial production failed to meet expectations.

What about the markets?

FIIs have been pouring money into the Indian markets this year. While net outflows from the Indian markets stood at a whopping Rs. 1.1 lakh crore in 2022, the inflow in 2023 so far has been of Rs. 38,000 crore. The inflows during April and May alone were to the tune of Rs. 55,000 crore.

India (along with Japan, South Korea and Taiwan) has emerged as a preferred choice in a challenging economic situation everywhere else:

  • The Fed’s decision to halt hikes has been a mixture of cooling inflation, and a deteriorating economy, which is feared to dip into a recession this year due to rates and the debt ceiling drama

  • With the EU unable to pause on hikes, damage is expected to only increase from here; the largest economy (Germany) is already in a recession

  • While China has been cutting rates, and is expected to continue doing so, its economic rebound has been a dampener so far, disappointing most of whose bets were placed there

A relatively strong economy, and a sharp rebound in earnings in FY24 are expected to keep the Indian markets buoyant; especially with rate hikes pausing, and with the rest of the world troubled.

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