Of late, India has become the most attractive destination or rather the most-preferred destination for global investors because of higher yields, a stable rupee, better economic growth and a stable political environment. In an interaction with Outlook Business, Richard Iley, chief economist, emerging markets, BNP Paribas, dwells on what lies in store for the Indian market.
Is the Fed rate hike becoming a non-event with the markets perceiving it as a very remote possibility?
As far as data points suggest, we are reaching a point where a hike is quite likely in December 2016. But that would be more of a tactical move and it will not have an impact on global markets because our view is that the US Fed will not be able to move rates decisively up anytime soon. I think Yellen has articulated the same at the recent Fed meet. And this is why our conviction is that emerging markets (EMs), particularly India, will continue to benefit.
What is prompting the Fed to go slow on a rate hike and does it mean that the Fed portends a bigger problem?
There is still some spare capacity in the US labour market, which means long-term unemployment is still quite high. Second, inflation in US is still very low and well below the Fed’s target of 2%. I think they are hoping that the economic momentum improves even further so that it can revive the labour market. The Fed used this phrase that there is scope for the economy to run further without tightening the policy. That will give more time and opportunity to bring workers back into the labour market. In a nutshell, there is no inflationary pressure in US. And if you do not have to act, why act now? Besides, you do not want to make the dangerous mistake of tightening too soon.
Isn’t low-to-negative interest rate a bigger risk to global markets, particularly EMs, than a higher interest rate?