Ukraine war dragging on, inflation still high: What lies ahead for markets

Meanwhile, inflation remains the big worry for the Fed, which announced a 25-basis point rate hike this month. Minutes of the last meeting of the Federal Open Market Committee released on Wednesday said “members anticipated that ongoing increases in the target range would be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 per cent over time.”

How could India be impacted?

Along with geopolitical worries, the Fed’s indication of more rate hikes to contain inflation is a major concern. If the Fed continues with rate hikes and retail inflation in India remains above 6%, the RBI may have to raise rates as well to ward off pressure on the currency. Continued rise in interest rates will impact consumption, the revival of economic growth, and the rise of equity markets.

Foreign portfolio investors will step up outflows if rates rise sharply abroad and India keeps them steady. In January 2014, RBI had hiked the Repo rate to 8% to bring down inflation from the 8% level.

Also, any spike in global crude oil prices will impact the current account deficit as India is a large importer of crude.

Is inflation still a worry?

RBI has hiked the Repo rate by 250 basis points to 6.5% since May 2022, but the inflation outlook is still uncertain. The risk from adverse weather events to the prospects for the rabi crop remains. The global commodity prices outlook is subject to uncertainties on demand prospects as well as risks of supply disruptions. The ongoing pass-through of input costs to output prices, especially in services, could continue to exert pressures on core inflation, according to the minutes of the RBI Monetary Policy Committee’s deliberations.

The easing of inflation in the last two months was driven by strong deflation in vegetables, which may dissipate in the summer. Headline inflation excluding vegetables is above the upper tolerance band and may remain elevated, especially with high core inflation pressures. Inflation, therefore, remains a major risk to the outlook, as the RBI has been underlining.

The central bank has lowered the retail inflation target for FY23 from 6.7% to 6.5%, which is still above the comfort level of 4%. It has projected inflation to be 5.3% in FY24.

What should investors do?

India’s economy has high growth potential, and dips in markets should be utilised to enhance equity investments to benefit from future rises. With fixed deposit rates rising and interest rates staying at higher levels, conservative investors can look to lock themselves into FDs and debt mutual fund products for the short to medium term.

Experts say that as rates are high and are expected to remain at elevated levels for some time, it may not make much sense to invest in long-duration funds.

“It is good to invest in short-duration funds of 1-3 years maturity for now. One can also look at credit risk funds. For long-duration funds, one needs to wait for indications from central banks on the lowering trajectory of interest rates,” a fund manager with a leading mutual fund said.

“We continue to emphasise that 2023 will be the year of multi-asset investing. The best approach is to have a well-balanced portfolio of equities, debt, precious metals, and global equities,” Siddharth Vora, Head of Investment Strategy and Fund Manager – PMS, Prabhudas Lilladher, said.