Equity Outlook: All eyes on central bank monetary policy stance for road ahead

By Animesh Deb
New Delhi [India], September 18 : All is not well in global financial markets. Market participants are not aggressively participating and are largely shying away from making large bets, especially on concerns of aggressive global monetary policy tightening by various central banks to avert recessionary fears.
Three of the largest five economies will hold their central bank meetings during the week starting Monday, including the US, Japan and the UK. Other scheduled central bank meetings include the Philippines, Indonesia, Hong Kong SAR, Switzerland, Brazil and Taiwan.
Consumer inflation in the US though declined marginally in August to 8.3 per cent from 8.5 per cent in July but is way above the 2 per cent goal. Several senior officials in the US central bank Federal Reserve recently said that another interest rate hike is imminent during the two-day monetary policy meeting that will start on September 20.
Moreover, global rating agency Fitch Rating on Thursday forecast that the US will suffer a "mild" recession in mid-2023.
Inflation in the UK is currently at 9.9 per cent.
These elevated inflation numbers give clear signs that the respective central bank will raise interest rates to contain price rises. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
"...the Fed's aggressive stance is expected to continue with the market pricing in a third consecutive 75 bp hike, though a 100-point rise is also on the table. Interest rates are expected to reach 4.25 per cent by the end of 2022," S&P Global Market Intelligence said.
"The FOMC meeting is the highlight of the week with the Fed expected to announce yet another super-sized hike. Markets are pricing in another 75-bp addition to the Fed Funds Rate," it added.
Meanwhile, against that backdrop, Indian stocks have extended losses for the third straight session on Friday. The benchmark indices - Sensex and Nifty - settled 1.8-1.9 per cent lower on Friday.
"The Dollar Index has been rising again post US inflation numbers on Wednesday. This would be negative for the equities and until we see a reversal there, the risk of a sharp correction (in stocks) in the short term is likely to remain high," said Ruchit Jain, Lead Research at 5paisa.com.
Inflation, both retail and wholesale, is high in India too, which may necessitate further interest rate hikes by the Reserve Bank of India.
"As global investors brace for a further interest rate hike post the US inflation data released recently, the RBI too has its task cut out in India when they meet at the end of this month," said S Ranganathan, Head of Research at LKP Securities.
In line with the global trend of monetary policy tightening to cool off inflation, the RBI has so far hiked the key repo rates -- the rate at which the central bank of a country lends money to commercial banks -- by 140 basis points in three tranches to 5.40 per cent.
The RBI is expected to raise interest rates in the range of 35-50 basis points in its next monetary policy committee meeting, said SBI Research in a report.
As per schedule, the next three-day monetary policy meeting will be held during September 28-30.
For the record, India's retail inflation rose to 7 per cent in August from 6.71 per cent the previous month due to a sharp rise in food prices.
Retail inflation exceeded the Reserve Bank of India's tolerance band for the eighth consecutive month. The RBI is mandated to keep inflation in a range of 2-6 per cent.
The RBI is deemed to have failed in its mandate if the average inflation remains outside the 2-6 per cent band for three consecutive quarters.
Whereas, India's wholesale inflation declined further during the month of August to 12.41 per cent from 13.93 per cent the previous month, but continues to remain in double digits for 17 months in a row now.