Anitha Rangan of Equirus
Anitha Rangan of Equirus thinks the RBI will likely pause after September, citing lower-than-expected GDP growth in Q1FY23, expectations of inflation coming closer to 6 percent by December, and more certainty in global policy actions going forward.
On the oil prices, the economist, backed by her 16 years of experience predominantly in fixed income, credit and economic research encompassing global and local markets, says while direct geo-political tensions may ease, the after-effect of reduced energy supplies from Russia is likely to linger. This means that reduced energy supplies to European region will keep the prices of oil contained or rather provide a floor of not coming down massively perhaps below $ 90 a barrel.
In an interaction with Moneycontrol, the economist shares her views on evolving macro fundamentals and the plight of the Reserve Bank of India in managing a soaring inflationary environment. Excepts from the interview:
Do you think the geopolitical tensions are gradually easing with the current developments in Ukraine and will that bring oil prices below $ 70 a barrel levels in coming weeks?
While direct geo-political tensions may ease, the after-effects of reduced energy supplies from Russia is likely to linger longer. This means that reduced energy supplies to European region will keep the prices of oil contained or rather provide a floor of not coming down massively perhaps below $ 90 a barrel.
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In addition, come winter the energy demands of European regions increases. Furthermore, note that the reduced prices is a function of global recessionary impulses. Over time if recessionary impulses ease especially in China and US, demand led recovery could also cap the downward risk in oil.
However, the point to note is that India benefits largely from discounted Russian oil prices and therefore energy inflation in India is not necessarily similar to rest of the world.
Do you expect significant depreciation in the British pound against the Indian rupee in coming quarters given the rising expectations for recession in Europe?
Depreciation of currencies currently are largely led by dollar appreciation. On the corollary, US dollar appreciation is driven by weakening Europe and UK currencies. While GBP and other currencies have freely depreciated against the dollar, Indian rupee’s resilience has been led by RBI’s support in the form of reserves.
Note that RBI has used around $ 90 billion of reserves and $ 30 billion of forwards in its defense of rupee volatility. Fear of recession will drive depreciation of GBP and EUR against USD not necessarily INR. And if this leads to dollar strengthening, then INR could also be impacted. However, RBI as stated is likely to continue to support INR from undue volatility.
Also read – IIP growth at 4-month low of 2.4% in July as base effect continues to normalise
Do you think the global macro environment may cap the market upside?
Global macro environment rather than capping the market upside does induce a lot of volatility. Global events in terms of central bank hikes, recession fears along with strong labour market (in the case of US), higher inflationary trends, softening commodities, easing of geo-political tensions presents a mixed picture in terms of direction of events. Therefore, one can expect more volatility in the near term spearheaded by uncertainty related to the turn of events.
What are the value themes that you are betting on for healthy returns?
On the domestic front, while global headwinds do impact the growth instincts, it is notable that domestic consumption is strong. Furthermore, domestic inflation is expected to head downward towards the end of the year, agriculture output provides a defense against sharp rise in food prices, central bank is not as aggressive as rest of the world and recovery momentum is sustained albeit at a slower pace.
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Therefore the themes that one can bet on are around are domestic consumption led and domestic capex. Among all the noise, the key positive is government is on track on its capex spending and private capex in brownfield is gradually recovering. Credit growth is notably strong indicating that the demand of working capital is robust further reaffirming that demand recovery is ongoing.
Do you think the RBI will take a pause in rate hikes after September policy meet?
Yes, the expectation is that RBI will likely pause after September. This is led by three reasons a) the lower than expected GDP growth in Q1, will lead RBI to lower its growth estimates and acknowledge that the growth for the year may also require support b) By next policy in December, inflation is likely to come closer to 6 percent and the direction will be more clear c) Global policy actions will have more certainty and RBI will get better visibility on global rate outlook which will support its pause.
Overall, RBI has always maintained a supportive growth-inflation dynamics. Note that policy is not the only instrument to act on rates. Liquidity is a powerful tool to raise rates especially in the shorter end of the curve (1-3 years). With the credit demand especially of working capital largely concentrated in the shorter end of the yield curve, using liquidity tightening to deliver “implicit” rate hikes may be the choice of instrument rather than repo rate. Also note that liquidity tool is at the disposal of RBI and therefore gives more flexibility to RBI to manage actions more dynamically rather than repo which is an MPC tool with less flexibility of dynamic changes.
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