MACRO ECONOMIC NEWS

 Delightful Is The Wind Blowing Deep Inside

Wishing A Heavenly Day Ahead

 

Best Regards

Arbind

 

-------------------------

Macro-Economic News 23 Feb 2021

 

Interest Rate Cycle, this time, may not follow its traditional relatedness with the economic cycle – a regime where central banks increase interest rate following inflation as an outcome of economic growth and reduce the interest rate to stimulate the economy steering out of the recessionary zone. Gone are the eras where infusing liquidity was a function of cost reduction. Now it is more a function of assurance – a sophisticated form of credit enhancement – and it is working well, although it takes a little more time but comes with more sustainability. In the near term, the policymakers would bear the burn of higher inflation, sizzling speculation, and elevated euphoria.

In coordination with the central bank, The treasury is willing to take a little more risk of capital concentration and slow wealth distribution - a trade-off for resiliency. Quoting Bank of England, “Interest rates may stay at historically low levels for decades.” India’s RBI, as per its recent minutes, prepares for nearly two years of accommodative stance a reflective of ‘time-based’ forward guidance and also worrying about the asset quality. Banks could see higher NPAs (non-performing assets) approximately one-sixth of its loan book – a little scarier – needed more policy attention and intervention. The Gross Fixed Capital Formation (GFCF) also declined by nearly the same percentage. 

An interesting question about the level of interest rate, inflation, and a resultant real interest rate (interest rate – inflation) has been resurfacing more frequently. Over the last 100 classical years of progress measured in terms of material growth, the world has sufficient evidence of growth euphoria leading to aggravated poverty and inequality along with the abundance of ideological propaganda leading to myopic policy prescriptions. High-interest rate regimes have not yielded sustainable positive interest rates for the wider population. The world, this time, might witness a prolonged period of lower interest rate, despite a difficult dilemma for continuing with financial excesses.

The market will witness bond selling followed by equities churning in a quest for taking benefits out of firms' ability to pass on the inflation impact to consumers (with higher price elasticity) – typically energy and related companies – taking leads followed by the companies with strong leverage potentials. 

-------------------------