By DK Aggarwal(Chairman and MD, SMC Investments and Advisors Ltd). The recent rally seen in global stock markets was fuelled by bright business outlook and strong corporate earnings amid diverging monetary policy expectations between the euro area and the United States.
Together, all these factors helped major global indices set a fresh all-time high. At present, the global economy is also fairly strong, with most economies are growing in parallel.
After taking unprecedented measures to bring global economy back to life after the financial crisis in the year 2008, central banks across the globe are joining the league of major peers like the US and ECB to roll back the unconventional measures taken during the crisis.
There is an expectation that the US Federal Reserve is likely to raise interest rates at its December meeting. Actually, the strong investor sentiment and a pickup in business investment in the US, which combined with a historically low 4.1 per cent unemployment rate, compelled the Fed to continue raising interest rates even as the inflation rate continued to unders hoot the Fed”s 2 per cent goal.
The US Fed has raised official borrowing costs four times since December 2015 to a range of 1 per cent to 1.25 per cent, and started to gradually shrink its $4.5 trillion balance sheet. Markets across the globe have already factored in that Fed would raise rates in its upcoming meeting.
The optimistic view of the newly-elected Fed Chairman Jerome Hayden Powell that Fed would continue to consider appropriate ways to ease regulatory burdens for banks while preserving the core reforms will continue to support the economy growth.
Meanwhile, the ECB has continued its largely accommodative stance, and market participants have adopted a wait-and-see approach to future policy rate expectations. In the last meeting ECB has announced its decision to taper asset purchases from 60 billion per month to 30 billion per month beginning in January 2018.
However, the policy is still largely accommodative, with the ECB”s deposit rate still in negative territory. With the stronger euro, the ECB is likely to be more cautious with its tapering communication.
Back home, the interest rates story is different. The Reserve Bank of India is likely to leave interest rates unchanged at its December policy meeting as inflation in India is inching up and the risks of inflation remaining high due to firming crude oil prices, increased financial market volatility, fiscal issues, etc.
Earlier in the October meeting, RBI expressed concern about rising inflation. Retail inflation, a key input for RBI in setting the key interest rate, has been rising consistently since the month of June amid a slowdown in IIP Numbers. It is expected that both external and internal factors would weigh on the mind of the monetary policy committee of RBI.
The divergence in actions of global central bank such as the Fed, ECB and RBI could bring volatility in the stock market. Also acceleration in Indias growth after five quarters is expected to prompt RBI to be more hawkish.
The Fed, which is expected to raise interest rates four times by the end of next year, has already started reducing its balance sheet, the ECB has promised to keep rates unchanged and to reinvest maturing bonds well into 2019.