Yield to Worst

Unseasonable rains can wreak havoc and increase inflation

Unseasonal rains can play a significant role in impacting the path of inflation. The terminal repo rate could top 6.5% as the Fed rate now rises to 125 basis points in 2022, according to an internal report from the SBI’s economic research arm.

CPI inflation for September rose to 7.41%. A decomposition of CPI food inflation into sub-components shows that, on a weighted contribution basis, food inflation was driven by cereal products and vegetables. The seasonal impact of rains on vegetable prices will now become noticeable. In the future, unseasonal rains in different parts of the country of up to 700% in grain-producing states could have a significant impact on grain and vegetable prices, according to the report.

According to her, in 2019, unseasonal rains that were much lower in proportion had pushed food prices firmly by 3% in the four months ending January 20. However, food inflation cooled down soon after, with vegetable prices falling significantly in March 2020. The problem however persisted with cereal prices at high levels as these prices are sticky on the downside and put time to come back. Due to the pattern and frequency of non-seasonal rains currently seen in major states, soaring food inflation could lead to inflation in December above 7% and the quarterly average is expected to be around 7%, at above RBI forecasts (6.5%). An eerie similarity to 2019’s inflation path could now mean RBI and market inflation estimates could go wrong.

“With an increase in Fed rate hikes in 2022 and unfavorable inflation forecasts, RBI will need to strike a good balance between rate hikes. We believe that the terminal repo rate in the current cycle could now extend through February 22, with a 50 basis point rate hike projected penciled into December policy.The only consolation could be a lower crude price and the negative growth in protein-rich eggs and the steady deceleration of meat and fish prices. We now expect the terminal repo rate to exceed 6.5%,” said Soumya Kanti Ghosh, Chief Economic Advisor, SBI Group. Meanwhile, capacity utilization of manufacturing companies after peaking at 75.3% in the fourth quarter of FY22 had fallen to 72.4% according to the latest RBI OBICUS survey.However, bank credit growth was seen across the board. s main sectors with a growth of 16.4% according to the latest figure of September 23. Outside of personal loans, it appears that the use of business working capital continues to be robust and to drive credit draw down, he said. added.

New investment announcements in the first quarter of FY23 had dropped to Rs 4.35 lakh crore from Rs 5.75 lakh crore in the fourth quarter of FY22. However, according to provisional figures for the second quarter from FY23, the same increased to Rs 7.73 lakh crore with a major contribution from Vedanta for its display unit and semiconductor plant in Gujarat worth more than Rs 1.50 lakh crore. Major industries where new announcements were made in the second quarter of FY23 include electronics, roads, marine infrastructure, basic chemicals, metals, real estate, community services and l unconventional energy, etc. Thus, growth remained robust, according to the report.

“Even though the Indian economy has weathered the crisis, global uncertainties are beginning to weigh heavily. Specifically, US credit markets appear increasingly nervous. Bloomberg’s Yield-to-Worst (YTW) trends ‘ for US investment grade, high yield (or junk) bonds and long US corporate bonds show similar trends to 2010 levels. until 2023, when the Fed rate is expected to peak,” Ghosh added.

The current accumulation of risk in US credit markets is a long-standing structural shift that has been tracked since 2018. The IMF’s Global Financial Stability Report in April 2018 noted that BBB bonds now account for nearly 50 % of index. investment-grade bonds (compared to 25% in 1990), an all-time high. Bonds with the lowest investment grade ratings accounted for a third of outstanding bonds, and over the past year debt burdens had increased the most for companies with weak balance sheets. The increase was mainly at the expense of bonds rated AA and above, whose current share is less than 10%, compared to more than 35% 30 years ago. The steady decline in the share of high quality bonds (AA rates and above) indicates a search for yield in an environment of durably low interest rates.

Meanwhile, US housing markets show that the four major jurisdictions where home sales data are collated are showing varying trends, with home sales not improving in major geographies. Sales of existing (formerly owned) homes in the United States edged down 0.4% (seasonally adjusted) to 4.8 million on August 22, the lowest figure since May 2020, continuing the course after a revised decline down 5.7% in July.

According to Ghosh, growth estimates for India have already been revised down. As the whole world faces the specter of an unprecedented recession in 2023, India still stands as an oasis in an age of uncertainty. However, we must temper our growth expectations for FY23 and FY24 from current estimates. 6-7 percent or even lower could become the new norm! Even then, India will still remain the fastest growing economy in the world by a wide margin.