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The global monetary policy regime is entering a tighter phase, with major central banks shifting away from the ultra-loose conditions of the past decade, while India could face 75-100 basis points of cumulative rate hikes if elevated crude prices persist, brokerage firm Motilal Oswal Financial Services said in a research report.
The brokerage said an October rate hike by the Reserve Bank of India (RBI) is a meaningful possibility if crude remains elevated and inflation expectations begin to rise. It retained its forecast of a 7.0-7.2 per cent range for the 10-year Indian government bond yield through the remainder of FY27, while projecting FY27 CPI inflation at 5.1 per cent, slightly above the RBI's 5 per cent projection. Brent crude has eased to around USD 103 a barrel from above USD 108-110 earlier in the week, but remains high and poses risks to inflation and India's external balance, the report said. Food inflation is also close to 6 per cent, while WPI inflation is near 10 per cent. The brokerage expects the combination of food and energy pressures to push CPI inflation above 6 per cent in the third quarter of FY27. Motilal Oswal said financial conditions in India are already tightening even before a formal repo-rate hiking cycle, citing the RBI's liquidity absorption through variable rate reverse repo operations (VRRR), open market operation (OMO) sales, higher domestic bond yields and tighter global financial conditions. The domestic brokerage firm noted that the US Federal Reserve raised its policy rate by 25 basis points in September, taking the federal funds target range to 3.75-4 per cent, while the European Central Bank and Bank of Japan have also moved towards tighter policy. The Bank of England retained its rate but delivered a hawkish vote. The brokerage said the shift is being driven by persistent inflation, elevated public debt, large fiscal deficits and monetary aggregates that remain substantially above pre-Covid levels. US 10-year Treasury yields have moved close to 5 per cent, while India's 10-year yield has risen above 7 per cent. The impact on Indian sectors is expected to be uneven. Banks could initially be relatively better positioned as floating-rate assets reprice, while NBFCs, real estate, autos, consumer durables and highly leveraged businesses could face greater pressure from higher funding costs. Export-oriented IT and pharmaceutical companies could receive some support from a weaker rupee, although IT remains exposed to slower global technology spending. Motilal Oswal expects the global economy to move from an era of abundant, inexpensive capital towards a period of tighter and more expensive money, with balance-sheet strength, refinancing dependence and pricing power becoming increasingly important for businesses. (ANI)
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