The market was expecting a bit dovish tone from the Federal Reserve, but the federal reserve did not provide any such indication.
However, the federal reserve’s tone was not hawkish either. We now anticipate that the federal reserve will deliver less than 75 bps moves. However, the pivot might shift to 5% instead of 4.5%-5%
This would essentially keep global central banks on a steady tightening path, and we expect the same in the case of India also.
RBI will likely hike the repo rate with 6.75% as the fulcrum terminal rate. Given the dollar strength and our current account deficit situation, we do not think RBI would lower its guard or pause earlier, as that would create additional speculative risks on INR.
Given that RBI has missed the inflation target zone for three consecutive quarters and the law requiring RBI to explain the government, we think RBI will not keep an even tighter vigil and hence tighten policy to levels where it is sure of meeting inflation targets and not pause prematurely on hope.
With this view in mind, we see yields hardening by 15-25 bps throughout the next couple of months. The yield curve is expected to remain flattish in the move.
This would mean some possible MTM impact on investors in the near term. However, it will also provide better accruals to existing and new investors once the yield increases.
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