Faced with Rising Inflation, the FED has done what It had to – Will RBI follow?
The statement by the Federal Open Markets Committee after its meeting this week and the accompanying projections indicate that the impact of the Russia-Ukraine conflict on the global economy is going to be quite severe. While the Federal Reserve was relatively sanguine in the February meeting despite fast increase of the Omicron variant of Covid 19, it sounded distinctively hawkish in the meeting this week, bringing about large revisions to its projections including the rate hike trajectory. The median projection for real GDP growth for 2022 has been marked down from 4% in the December meeting to 2.8% now, while the personal consumption expenditure inflation projection has been revised higher from 2.6% to 4.3%. The FED has however made it clear that price stability is the key to fostering growth and ensuring maximum employment and has taken a rather aggressive stance to tame inflation. Contrary to the median projections made in the December meeting, the projections now indicate 6 to 7 hikes of 25 basis points each in 2022 alone, taking the policy rate to 1.9% by the end of the year. This is to be followed by four similar rate hikes in 2023. The RBI may soon have to follow in the Fed’s footsteps and will need to acknowledge that inflationary pressure is larger and longer lasting than originally expected. Rising inflation will result in demand destruction, in turn peg growth lower. Further, it is imperative that fiscal measures of cuts in duties are employed to tame the price rise. RBI’s actions should be carefully thought out as precipitate action can prove counterproductive and end up hurting growth.
Bank of England hikes Rates for Third Time in a Row
As the Ukraine war adds to inflation concerns, the central bank of the UK had to hike rates for the third time in a row. UK inflation was already running at a 30 year high prior to Russia’s invasion of Ukraine. The war has sent energy prices surging and will exert more upward pressure on the central bank’s inflation projections. The Monetary Policy Committee upped its forecast to 7.25% in April against the backdrop of strong growth and robust labor market in the UK.
It is Opportunity NBFCs rather than Advantage NBFCs.
There is liquidity and it is available to everyone in the system. There is opportunity for every NBFC that has set a very high standard of Governance and Compliance that will automatically become an advantage. While the US has 4913 banks. India has 34. If we are looking to become a $5 trillion economy, we need to get $6 trillion in credit, we currently have $2.6 trillion credit. The large public sector banks can provide $1.5 trillion extra credit with the capital they currently have which clearly does not meet the credit requirement. NBFCs with robust monitoring mechanisms in place and strong governance & compliance structures in place are well placed to meet this demand.
Lack of collateral has hindered SMEs from accessing formal credit. An effective incentive system where the lenders and borrowers are not pitted against each other is needed. Stories of deserving SMEs/MSMEs whose growth and ability to generate employment are impaired for want of credit abound. While MSMEs are critical for employment generation, the credit flow into the segment remains abysmally low. An estimated 15% of MSME debt demand is funded by the formal financial sector. Credit Guarantee Schemes offer Government intervention to unlock finance for SMEs.
Powell, Putin or Potential of India – What will Drag Nifty
There are 3 Ps, Fed Chair Jerome Powell, Russian President Vladimir Putin and the Potential of India that will affect the Indian Investors in the days to come. Near term, it is clearly the war, in the medium it is the Fed and in the long term (opportunity) is the Indian structural story.
