The FOMC meet has started and we are likely to see the Fed Chairman trying to soothe the markets vis-a-vis the tapering programme. However, global markets have been reacting to the big story coming from China. But now the markets seem to have stabled and India has been outperforming. Is everybody expecting Evergrande not to default?
Yes, it seems payments will be made now even though it is a bit unclear still as they seem to be talking about onshore bond payments. There is no mention yet of the offshore payments that are due. It is not clear yet. It is good news nonetheless that some payment is likely tomorrow.
So while the markets await that clarity, in the last couple of days, we have seen clarification coming in from all quarters. If one looks at the flows, it does seem as if India is getting a premium for not having this kind of problems for not having the kind of policy uncertainty or loss that are smashing our companies?
India has really benefited from strong inflows into the equity market and foreign investors seem to have continued to like Indian assets in some way. Evergrande has been a running issue for sometime but the contagion certainly has a bigger impact globally this week. At the same time, concerns about Fed tapering and the resultant weaker growth is something that is impacting markets, Higher inflation risks, Covid risks still remain.
The fact that investors are still showing a positive tone towards Indian assets and the Indian rupee as well to some extent Indian bonds shows that to some extent, India has managed to come through the Covid crisis and the massive wave that we saw in the past. Growth recovery has been fairly firm. There is still a strong consensus bringing growth this year. Potentially, around 9% or so growth is expected and it all looks positive in that respect.
Markets are already working with the assumption that come November, there is going to be taper and then there is the BoJ meeting today as well. Could we hear anything from the central banks which could perhaps shake up the markets?
There are a lot of central bank meetings this week and that is obviously going to be the key. From the Bank of Japan, we are not looking at any changes in policy. But in the case of the FOMC, it is going to be very interesting. We would need to see how close the Fed is to tapering. November or December seems likely in terms of the beginning and we will focus on the dot plot as that is the key. We will follow how FOMC members see the first Fed rate hikes and to what extent there is a risk of a hawkish shift in the dot plots.
The markets are pricing in tightening by around March 2023. If we do see a shift towards earlier tightening and if the dot plots shown earlier shift, one could see a hawkish reaction in markets which may bode well for the dollar and probably less well for bond markets. But that is going to be a key focus in terms of what the Fed tells us today.
