It is evident now that economic growth is slowing appreciably around the world. While this is widely acknowledged by now, one suspects the extent of the eventual slowdown is still not. There seems to be momentum to the slowdown given the context of more restrictive fiscal policy now and the fact that central banks will widely keep monetary conditions tighter for longer.
While China is loosening policy on the margin, there are multiple constraints here both on the quantum of easing possible and the net effect of the same. Thus the only (temporary) respite to the downward momentum to global growth could potentially be from a possible cessation of war and a consequent sharp correction in energy prices (this is mentioned as a possible scenario here and not a view).
Barring that, one would expect the higher momentum data slowdown to eventually feed into the ‘stickier’ parts of the world economy. As one example of this, concurrent data on US housing sales has turned down significantly. Signs that this is percolating into new construction are very much there.
One would think it a matter of time that the housing slowdown starts showing up in house prices and from there as a negative wealth effect for consumers. This in turn may weigh further on discretionary consumption (including for services) which is already slowing. The construction slowdown alongside the ongoing manufacturing weakness would show eventually in the labour market and from there into wages.
The last of these is the slowest moving piece in the chain just described. However this is precisely the shoe the Fed is waiting to see drop, and that is the reason that policy rates will have to be held higher for longer. An implication of this also is that while sovereign rates may already have done the heavy-lifting, corporate bond spreads in developed markets (DMs) appear way too sanguine given the macro context described here.
One can think about India’s own growth momentum in context of slowdown spreading to stickier parts of the world. We have two distinct advantages going for us. One, a long period issue on local corporate and bank balance sheets is now behind us. This has been a significant cyclical drag over the past many years which has now turned into a tailwind.
Two, India’s total monetary and fiscal policy response to Covid has been measured and responsible. This implies that there is very little overhang to deal with of excess stimulus from the past unlike in the case of many developed economies. This is also the main reason behind our view that India needn’t follow the US lockstep in monetary tightening and that we can afford for our effective overnight rate to peak below 6 per cent in this cycle.
Returning to point, however, the cycle and policy tailwinds are ensuring that we now grow more robustly than many other nations around the world. The relative growth advantage will likely sustain going forward.
However, the absolute growth acceleration that we have witnessed over the past few months will have to slow reflecting the weakening global growth. This starts through the export channel, as it already has, and then proceeds to impact local consumption and investments down the line.
Stabler rate hike expectations in DMs from here
Global rate hike expectations were in constant iteration mode (read being continually revised upwards) for most of this year till mid-June. Post that things took a breather. For a while as signs of economic breakage started to become clearer, markets began running somewhat ahead of themselves by not just lowering their terminal rate forecasts but in some cases even building significant rate cuts for late 2023 in some developed markets. As an example, around mid-July approximately 80 bps rate cuts were being priced in for the US next year.
Over the past few weeks, on the back of active central bank pushes against this idea helped with continued upward pressure on European inflation, ‘sense’ seems to have returned. This has been evidenced in both terminal rate pricing going up as well as an expectation now that they will be at higher levels for longer.
This is now more consistent with the message delivered, as an example, by Fed Chair Powell in his recent Jackson Hole speech. In Europe, policy tightening expectations had built in significantly till mid-June but then unwound appreciably on the back of weaker economic data.
However, with inflation concerns going up further and with ECB seemingly showing firm resolve to contain it, rate hike expectations have sharply risen again. These gyrations are best reflected in the movement of German 2-year bond yields over the past few months. The UK has also seen very sharp recent additions to rate hike expectations from the market.
Given all of the recent building back of rate hike expectations, and with clear signs of economic breakage becoming more pronounced, it is unlikely that incoming data leads to more than, say, a 25 bps upward change in expectations from the current levels in most major DMs. Pricing is already for peak rates in this cycle being significantly higher than what are termed as long term neutral rates and thus incoming data needs to very sharply surprise for this to move even higher by a significant step.
Turning home, rate hike expectations with respect to RBI seem to also now be stabilising. To recap, these expectations had become quite unanchored post the inter-meeting hike in May. While we had held on to our view of peak effective rates in this cycle at sub-6 per cent (basis our reading of the current global macro cycle as well as India’s total, relatively modest, post Covid policy response), market pricing was far in excess of this at ‘peak fear’ after the May event.
However, now here as well market seems to be converging towards a peak repo rate of 6-6.25 per cent which is much closer to what we have been thinking. Our view of peak effective overnight rate of 5.75 per cent is consistent with a terminal repo of 6 per cent with overnight rates round the SDF, 25 bps below.
Tighter global financial conditions & possible implications
While DM sovereign rates may be more range bound from here, this doesn’t mean that we are done with tightening in global financial conditions. As rates stay tighter for longer in the face of economic breakage, this may get evidenced more in the usual risk off trades like stronger DM currencies and wider corporate bond spreads (DM corporate bond spreads are still relatively well behaved and seem to have significant room to expand).
Many emerging market (EM) bond yields are also like ‘spread’ assets for global capital. Thus a tighter for longer policy environment in DMs will entail stricter financial conditions and hence a widening of spreads. This may impact yields in many EMs as well.
Over the first half of the year when the world was readjusting its expectation of global monetary tightening, the linkage to Indian bonds was largely through interest rate swaps rather than outright bond selling by foreign investors in a big way.
Most of the capital outflows were instead from the equities markets. This probably reflects the fact that active foreign interest has been missing from Indian bonds over the past few years and hence the amount of rebalancing out may also consequently be lower. Portfolio rebalancing on possible another bout of risk aversion ahead may not impact India’s bonds significantly.
Also with spread between bond and swap having opened up (5 year government bond yields were around 60 bps over 5 year swap yields at the time of writing), there is room for this to compress without significantly impacting underlying bond yields.
However, this doesn’t mean that local bonds are immune to global financial conditions tightening. This needs to be still respected, in our view. As an example, lately the local bond market is abuzz with expectations that India is on the cusp of being included in at least one of the large global sovereign bond indices.
The argument heard is that this time around this is on ‘pull’ from investors desiring some diversification to their EM exposures. Hence it may go through even without associated facilitators that required leeway on taxation which apparently our policymakers were against.
The expectation is that the while flows associated with actual index inclusion may take some time, and the weight assigned to Indian bonds in the index itself would only gradually go up, other ‘fast money’ flow may pre-empt this and already start coming in.
Basis this expectation, one has seen a bull flattening over the past few sessions thereby further flattening the 5 to 10 year yield spread, as local participants have taken positions in longer duration bonds anticipating this announcement.
We have no idea how far this can stretch in the near term. However, nothing changes to our underlying view that if there’s one point of concern that bond markets ought to have over the medium term, it is the amount of duration supply.
This is both on account of higher than pre-pandemic averages on likely fiscal deficit over the next few years as well as a shift higher in annual bond maturities over the next many years from what was the case in the past.
Even adjusted for nominal growth in participant balance sheets, this is a significant step up in duration supply and likely needs support from a demand standpoint. Absent offshore investors, RBI would have eventually stepped in to buy bonds as a means to expand its balance sheet.
With index inclusion, offshore investors will buy bonds and RBI will get the dollars to expand balance sheet. Then RBI wouldn’t need to buy bonds. Either way, over the medium term, the eventual effect on bond yields may be similar.
Thus the issue of duration absorption may still persist after the initial euphoria on index inclusion subsides. Also this would be in what is a tighter global financing environment. In India too even as our peak rate expectations are in place, we would expect RBI to hold them there for longer.
Thus, investors should continue to want higher risk premia from yields for holding higher duration over the medium term. Also given how unforgiving the global environment is, we don’t want to be too ‘tactical’ with our portfolio strategies by trying to chase the bull flattening. All told then, we continue to find the most value in 4 -5 year government bonds.
(The author is Head-Fixed Income at IDFC AMC.)
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Shah urges cooperatives to accept GeM platform
Union Home and Cooperation Minister Amit Shah on Tuesday urged all the cooperatives across the country to register themselves on the Government e-Market (GeM) portal, which he said is the best way to promote and expand them.
Minister Shah made the remarks at the event of the e-launch of onboarding of cooperatives on the GeM portal, a first-ever initiative as so far GeM platform was not enabled for registration of cooperative societies as buyers on platform.
Now, all eligible cooperatives across the country will be able to start placing orders on the GeM– which is a one-stop procurement system for goods and services.
The GeM has been set up as the national procurement portal to provide an end-to-end online marketplace for Central and state government departments and ministries as well as Public Sector Units (PSUs) for common-use goods and services in a transparent and efficient manner.
Speaking on the importance of GeM and its benefit, the home minister said, “The ‘Quit India Movement’ jolted the British Empire on this day (August 9) when Mahatma Gandhi gave the slogan. India finally gained independence on 15th August 1947. As we celebrate ‘Azadi ka Amrit Mahotsav’ this year, the doors to the GeM (portal) are being opened for cooperative societies.”
‘Western sanctions won’t affect our trade’
Russia’s envoy Denis Alipov on Tuesday underlined the strength of bilateral ties with India, saying the positive dynamics of trade between the two countries will continue despite the West’s sanctions against Moscow. In an interview with Sputnik News India, Alipov said there were certain difficulties with trade after the start of the Ukraine conflict but added that both countries have successfully overcome most of these barriers. He said sanctions will certainly throw up challenges but the cooperation will continue based on common interests.
“Unfortunately, in the first months after the launch of the special military operation in Ukraine there were certain difficulties with supplying Russian goods to India and vice versa. However, today we have successfully overcome most of these barriers. We are confident that Indian exports to Russia (including science-intensive ones) will gain momentum in the near future,” he said. The envoy noted that the goals outlined in December 2021 at the annual bilateral summit in New Delhi are fully consistent with the enormous potential of the bilateral relations.
“The India-Russia partnership operates on all sorts of levels. We are expanding cooperation in communications, diamond processing, forestry, healthcare and pharmaceuticals, tourism, railroads, metallurgy, civil aviation, shipbuilding and oil refining. Our military and military-technical cooperation is being strengthened,” he said. The Russian ambassador said the dynamics of bilateral trade speak for themselves.
“According to India’s statistics, from January to April 2022, it amounted to USD 6.4 billion. This is almost twice as much as for the same period last year. If we maintain these volumes throughout the year, we will have a turnover of more than USD 19 billion by the end of 2022. To put this in context, let me remind you that in the previous year we had an absolute record of USD 13.6 billion.” Alipov said that Russia sees good prospects for Indian pharmaceutical products, leather and textiles, agricultural goods, components for machinery and equipment, telecommunications equipment, organic chemistry products.
“We expect growth in mutual turnover of services in such sectors as tourism, finance and insurance, telecommunications and information technology, transport and construction. We have great hopes for the implementation of the International North-South Transport Corridor (INSTC) project,” he said.
Qatar, India review bilateral relations
Prime Minister and Minister of Interior Qatar, Sheikh Khalid bin Khalifa bin Abdulaziz Al Thani received Vice President M Venkaiah Naidu at Amiri Diwan in Doha on Sunday. “PM & Minister of Interior of Qatar, Sheikh Khalid bin Khalifa bin Abdulaziz Al Thani received VP @ MVenkaiahNaidu at Amiri Diwan in Doha,” tweeted MEA spox Arindam Bagchi while he informed about the congregation. Continuing the thread, he said that both sides held delegation-level talks and reviewed bilateral relations including trade, investment, and economic and security cooperation. Vice President Venkaiah Naidu received a warm welcome from the Indian community as he arrived in Doha during his last leg of the three-country visit. Naidu wrapped up his Senegal visit yesterday. During his visit to these two countries, India signed two MoUs in Gabon and three MoUs in Senegal in different sectors which underlined the warm and friendly relations between the two countries. Vice President Naidu, during his visit to Senegal also described India as the largest democracy in the world, and Senegal, as one of the most stable and model democracies in Africa. On his three-country visit, Naidu is accompanied by Dr. Bharati Pravin Pawar, Minister of State for Health and Family Welfare, Sushil Kumar Modi, Member of Parliament, Vijay Pal Singh Tomar, Member of Parliament, P. Raveendranath, Member of Parliament, and senior officials from the Vice President’s Secretariat and the Ministry of External Affairs.
BJP suspends leaders over inflammatory remarks
I n an apparent response to the ongoing controversy over party spokesperson Nupur Sharma and Naveen Kumar Jindal’s alleged inflammatory remarks against minorities, Bharatiya Janata Party (BJP) on Sunday suspended Sharma and Jindal from the primary membership of the party till further notice. Earlier in the day, BJP said in a statement issued by its general secretary Arun Singh, “The BJP strongly denounces insult of any religious personalities of any religion. The Bharatiya Janata Party is also against any ideology which insults or demeans any section or religion. The BJP does not promote such people or philosophy.” BJP stated that it “respects all religions” and is “strongly against any ideology which insults or demeans any sect or religion”. “During the thousands of years of the history of India every religion has blossomed and flourished. The Bharatiya Janata Party respects all religions,” the brief statement said. “India’s Constitution gives the right to every citizen to practice any religion of his/ her choice and to honour and respect every religion. As India celebrates 75th year of its independence, we are committed to making India a great country where all are equal and everyone lives with dignity, where all are committed to India’s unity and integrity, where all enjoy the fruits of growth and development,” it said.
Multifaceted efforts on for green conservation: PM
Stating that developed nations are responsible for the largest carbon emissions, Prime Minister Narendra Modi on Sunday said the various campaigns launched by the Centre as part of India’s multi-faceted efforts are contributing in the conservation of environment. Speaking at the ‘Save Soil Movement’ program, PM Modi said, “Many government schemes carry the message of environment conservation. Be it Swachh Bharat Mission, Namai Gange, or One Sun, One Grid. India’s efforts are multifaceted. Developed nations are responsible for the largest carbon emissions.” He said that India is making many efforts for environmental conservation even while India’s contribution in carbon emissions is negligible. The Prime Minister further laid emphasis on the importance of “Soil Health Cards” in changing the mindset of the farmers. “Soil Health Cards are playing an important role in changing the mindset of our farmers. These cards provide farmers with the nutrient status of their soil and its composition. This is helping them decide what is needed for good soil health,” PM Modi stated. PM Modi said that a huge campaign was launched to give soil health cards to the farmers in the country when they were not aware of soil health. “In this year’s Budget, we’ve announced natural farming along the Ganga river corridor and will be promoted. In March, we have begun the rejuvenation project of 13 rivers. It will also help in increasing the forest cover by over 7,400 sq km,” he added. “ The policies related to biodiversity and wildlife that India is following today has also led to a record increase in the number of wildlife. Today, India has achieved 10 percent ethanol blending in petrol five months ahead of its target,” he further said. The movement was started by Sadhguru in March 2022, who embarked on a 100-day motorcycle journey passing through 27 countries. June 5 marks the 75th day of the 100- day journey. World Environment Day is celebrated annually on June 5. It offers a global platform for inspiring positive change in the environment. It also pushes individuals to think about what they consume from the ecosystem and gives them a chance to build a greener future.
ITC Classmate engages students to create urban forests
Encouraged by the ITC’s largescale afforestation initiative, Classmate, the company’s leading stationery brand, has taken up a local tree plantation initiative in Chennai along with students on the occasion of the World Environment Day. Over the past two decades, ITC Limited has been supporting a sustainable and inclusive forestry value chain for its Paperboards and Specialty Paper Business, contributing to carbon sequestration by creating a large green cover, whilst supporting large-scale livelihoods for tribals and marginal farmers. The business has adopted an indigenous fibre-sourcing strategy by supporting the growing of renewable plantations, thus contributing to import substitution. ITC’s large-scale afforestation p r o g r a m m e h a s g r e e n e d o v e r 9,50,000 acres o f l a n d a n d provided over 170-millionperson days of sustainable livelihood to farmers to date in India. The efforts made by ITC to promote r e sp o n s ib l e s o u r c i n g a n d sustainable plantations have led to the Forest Stewardship Council certification as well as membership of WWF-Global Forest and Trade Network. ITC Classmate’s small but significant afforestation drive involving school students aims to complement the efforts of volunteers combating climate change at a local level. It has partnered with the Environmentalist Foundation of India, who have been invited by the Chengalpet district administration to create a forest patch at Vengadamangalam which is a fast-growing residential suburban pocket of Chennai and is witnessing contamination of land, water, and air with a profound shift in land use, growth, and ecology at large. It is developing this project as an urban forest as part of a collaboration between the government, industry, students, and civic society. The objective of this afforestation project is also to motivate school students fully understand the importance of environment positive actions and develop eco-consciousness. To ensure that, ITC Classmate has planned a dedicated orientation program in 24 schools in the city from June 10 to July 31. The program aims to enhance their understanding of nuances of resource utilization, biodiversity preservation, and sustainability. After attending the orientation program, students are expected to volunteer at the afforestation site in Vengadamangalam and get involved in postplant maintenance like plant watering, manuring, nourishment, etc. Speaking about the initiative, Vikas Gupta, C h i e f E x e c u t i v e , E d u c a t i o n a n d Stationary Products Business Division, I T C L t d . , s a i d : “Climate change is today impacting us in myriad ways. Going forward, the young generation will have to play a significant role in environment conservation.
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