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Over the last three years, the macroeconomic situation has changed and we are now in a situation wherein the impact of these past policy hikes is being felt in the economy. Besides, the impact of higher policy rates in India on actual lending rates in the system has been much higher than say in the case of the US economy.
This statement of Warren Buffett is so apt in the present market scenario. Markets, debt and equity are in a state of flux worldwide. While the last year was characterized by a large number of central banks across the globe tightening interest rates, the scenario has changed dramatically in the last few months.
The main issue facing global markets today is the growing defaults in the subprime mortgage sector in the US and whether this would ultimately lead to the US Federal Reserve cutting the Fed Rate, and more importantly to what extent. While the markets have just started focusing on the US subprime defaults, these defaults first came to light much earlier. However, when the underperformance of this segment became obvious, the rise in credit spreads was limited only to the lower rated segments. However, the rise in credit spreads is now being seen in all segments, resulting in a significant tightening of liquidity, necessitating the Central Bank intervention in the form of the Fed cutting the discount rate and other global central banks injecting liquidity into the banking system.
So what does this mean for interest rates in India? Does this imply that interest rates in India are also likely to move down?
Interest rates in India have been on an uptrend over the last three years. RBI raised the repo rate from 6% in 2004 to 7.75% currently. At the same time, the Cash Reserve Ratio (CRR) was hiked from 4.5 to 7%. The key factors leading to RBI hiking domestic interest rates were: |
