We are not out of the woods yet: Mitul Kotecha

“It is very hard to disentangle the impact on India from the rest of the world but yes equities have decorrelated to some extent. However, the rupee has come under more pressure because of the strength in the dollar and as have many emerging market and developed market currencies and the pressure on inflation has been pretty significant in India too for various reasons,” says Mitul Kotecha, Chief Emerging Market Asia & Europe Strategist, TD Securities.





What is the Bank of England essentially trying to do? Two weeks ago they were talking about fighting inflation; now they are coming back and are intervening. Aren’t they creating more panic?

I think there was little choice. Quite frankly the pressure that we saw on gilt markets in the UK was considerable and that had a substantial impact on pension providers like Final Salary Pension who hold collateral and ultimately would have caused substantial pain in that sector of the market.

So given the volatility in the market and the move in gilt yields and, of course, the fall in sterling, the Bank of England probably had little choice but to intervene. Now the question is how much can they do? They talked about $5 billion pounds and it is a 13-day process, but it does conflict with their policy of quantitative tightening and of higher rates and the risk, of course, is to fuel further inflation.

So there are clearly risks to this policy but the reaction by the Bank of England is really just to deal with market dislocations and volatility which have been fairly intense in recent days. But this obviously does pour more fuel on the fire.

How come central banks are still worried about data which is coming with the lag effect in commodity prices? In the last 15 days of price action in just about every major commodity from crude to cocoa powder, from orange juice to timber prices, all commodity prices are lower which means inflation is headed lower. Why is the Fed and other central bankers so worried about yesterday’s data and not focussing on tomorrow’s price?

Inflation is showing signs of peaking but it is at such a high level relative to target and probably not moving down as quickly as central banks would hope for, is adding to the sense that central banks need to continue to act and it is true that going forward inflation should start moving lower, but in the next several months, the US inflation will not be at the Fed’s target which is 2%. So they still have a long way to go to push inflation lower.

The issue here is why has inflation been allowed to move so much higher than target in so many countries and the central banks are belatedly acting more aggressively to tighten policy. This should have been the case months back. We still think that the Fed will hike to a terminal rate of around 4.75% to 5% and so there are still some legs to come.

ET Now: While the Indian equity market has been fairly decoupled from the western counterpart, the fact is that the parameters and the dot plot affecting us is pretty much the same. How will this disconnect between what is happening with the money markets and what is going on with the risk off sentiment, going to play out for India?


Mitul Kotecha: It is very hard to disentangle the impact on India from the rest of the world but yes equities have decorrelated to some extent. However, the rupee has come under more and more pressure because of the strength in the dollar and as have many emerging market currencies and even many developed market currencies and the pressure on inflation has been pretty significant in India too for various reasons.

It is going to be very hard to disentangle and the RBI will continue to hike interest rates to dampen inflation pressure. At the same time, the dollar will remain rampant in the near term and that continues to pressure the rupee. But equities are getting a bit of a better environment than the malaise in global equity markets and that has been beneficial for India from a growth perspective is less external demand driven than many of countries so its economics is stronger, it is still one of the strongest growing economies in the world.

Domestic demand has picked up post Covid and so India does stand in a better position than many emerging markets, especially those that are trade related and are facing more pressure, particularly from the weakness in China and the weakness in demand for exports from the US and Europe.

Given that we have seen this very stark shift now from the aggressive tightening campaign that global central bankers had undertaken in order to cope with surging inflation, what is the outcome now or what is the kind of trend that you see global central bankers going for?

I still think it is a trend of continued hikes. We have not passed the peak by any means here. The Fed is still seeing potential of a 75 basis points move in the November meeting and December again this year. The ECB will probably have to hike aggressively as well going forward as well as the Bank of England.

In the case of the weaker currencies against the dollar, adding to pressure for higher interest rates as well, it really is keeping the foot on the pedal in terms of rate hikes and this is not just in developed markets. If we look at many emerging markets, we are still seeing pressure for higher rates. Some have been pretty aggressive when you look at for example Latin America but when you look at Asia, many central banks still have to continue to tighten. So,we are not out of the woods yet and the situation may continue for the next several months..

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