Synchronised rate hikes by 3 central banks in 24 hours: More trouble for Nifty bulls?

NEW DELHI: Following the footsteps of the world's largest and most powerful central bank - the US Federal Reserve - two other major central banks, Bank of England and European Central Bank, also hiked interest rates by 50 basis points in less than 24 hours. But what left investors in global equity markets worried is the synchronised stance taken by all three central banks that the rate hikes and monetary tightening, thus far have not been restrictive enough and there are still more grounds to cover.

"Keeping interest rates at restrictive levels will ensure an overtime reduction in inflation by dampening demand and guarding against the risk of a persistent upward shift in inflation. This creates a dichotomy between the markets and what the central banks are communicating," Dhananjay Sinha of Systematix Group said.

As none of them is remotely talking about the possibility of a rate cut any time soon, markets are challenging the same by factoring in the possibility of a rate cut with the recession-like situation gaining traction.


Even though the outcomes were widely on the expected lines, the tone and forward guidance were extremely hawkish.

Sinha said there were four similarities in the three monetary policy outcomes - sticky core inflation persisting for a considerable period of time, tightness in the labour market, management of an extraordinarily high balance sheet, and rising recession concerns.

The ECB, which expects a shallow and short recession as inflation risk is skewed to the upside, warned that it would need to raise rates “significantly” further to tame inflation.

After tanking 879 points on Thursday, Sensex lost another 400 points on Friday morning and is set to end the week on a negative note. The impact, however, has been more stern in global markets with S&P 500 falling 2.5% overnight. Stock markets in both Japan and Taiwan were trading over 1% lower today.

"India is likely to be less impacted by the bearish trend, but investors can wait for the global markets to stabilise before making fresh commitments in this overvalued market.
Moving some money to fixed income makes sense since fixed income returns are turning attractive," Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.

Though geopolitical tensions and supply chain disruptions persist, India is on a much better footing relative to other global economies. RBI's next monetary policy meeting is in February 2023, and the consensus estimate is for a 25-basis point hike.

"If inflation normalizes in the MPC's determined range of 2-6%, there is a high possibility that a rate hike may not be needed. The focus could then shift from taming inflation to improving economic activity," said Gopal Kavalireddi, Head of Research at FYERS.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)