Interest rates and inflation – what’s next?

9 Dec 2022

In its latest policy meeting this week, the Reserve Bank of India raised repo rates by 35 basis points. *

The rate has been raised for the fifth time in a row now, and is currently at 6.25%. *

“...the MPC is of the view that, further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the core inflation persistence and contain second round effects, so as to strengthen medium-term growth prospects,” the central bank said in its statement.

The RBI has raised interest rates by 225 basis points since the rate hike cycle began this year. In the same period, overnight rates have moved up by about 300 basis points, said Abhishek Bisen, fund manager for debt at Kotak Mahindra Mutual Fund.

“Market participants who were expecting the RBI’s stance to turn neutral were disappointed, and this has resulted in a marginal uptick in bond yields,” he said, while discussing the outlook for December.

The RBI has revised the GDP forecast for 2022-23 (Apr-Mar) to 6.8% from 7.0% earlier, while retaining the inflation target for the same period at 6.7%.

Globally, the gap between inflation and interest rates seems to be high in the US, which could lead to the US Federal Reserve further raising rates to up to 4.75-5.00%, Bisen said.

In India, oil prices easing can offer comfort to the RBI as it will help in bringing down inflation, but the Indian rupee remaining under pressure is likely to keep the Indian central bank on its toes.

Investors can consider increasing the duration of their investment portfolio and look at actively managed duration funds and target maturity funds, Bisen said.

 

 


 

* Source: rbi.org.in, data as on Dec 7, 2022

This article is for information purposes only. The information provided herein is derived from public sources, believed to be from reliable sources. However, no representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. Views expressed herein involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. Kotak Mahindra Mutual Fund/ Kotak AMC is not indicating or guaranteeing returns on any investments. Past performance may or may not be sustained in future. Readers should seek professional advice before taking any investment related decisions and alone shall be responsible for any decision taken.

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© Kotak Mutual Fund.2022
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
© Kotak Mutual Fund.2022
Mutual fund investments are subject to market risks, read all scheme related documents carefully.