Global Economies now Hinge on Interest Rates

“The dollar is our currency, but it’s your problem.” This was the statement made by US Treasury Secretary John Connally in late 1971 at the G-10 Rome meetings. Even after 50 years when it was uttered first, the statement seems to be true more than ever. Tight US monetary policy in response to surging inflation in the US is creating issues across and around the global economy. To help bring down inflation, which has hit 40-year highs this year in the US, the US Federal Reserve has aggressively hiked rates in its last three meetings. This has led to the Dollar index, the value of the US currency compared to a basket of other international currencies like the euro, pound sterling, the Japanese yen and others, to its highest in nearly 20 years. 

Such aggressive hikes have also narrowed down the interest rates gap between India and the United States to a 13-year low. And when interest rate differential is narrow, FIIs pull assets away from emerging markets like India due to high interest rate in the US itself. Sadly, despite India being in a sweet spot with expected growth of around 7 per cent – the highest by major economies globally – we will have to follow the US Federal Reserve in hiking the interest rate. This might slow down our growth.

Meanwhile, in the wake of the pandemic there has been acceleration in global companies’ efforts on diversifying their supply chain. Too much reliance on China, considered the manufacturing hub of the world, led to disruption in their business activities during the pandemic. In addition, the Joe Biden administration is likely to announce new restrictions on China’s access to US semiconductor technology. Clearly then, one country’s loss is another country’s gain. Against this background, our cover story this time delves deep into this subject to give you a 360-degree view. 

It highlights the specific sectors that stand to benefit from the shift in production from China to India. Further, in one of our special stories, we have focused on portfolio management techniques using beta. The story explains ‘how to play with beta’ to outperform the markets. Another special story that may interest many of us here focuses on identifying micro-cap stocks with true growth potential. Indeed, some of the micro-cap stocks have created huge amount of wealth for investors in the past one year when the key benchmark indices have been down by nearly 8 per cent. 

Apart from the known risks that are bothering us, the Credit Suisse saga has been hitting the headlines recently. Some say it is the Lehman moment for the markets and clearly the markets are a little worried about the events unfolding in one of the biggest banks in Switzerland. My take on the whole matter is that the problems faced by Credit Suisse will impact central banks’ policies over the world on the issue of interest rate hike. The sudden and rapid hiking of rates is creating economic imbalances and is seen negatively impacting economic growth. Hence, we may see some rational delays in interest rate hike going forward. This is essentially good news for the equity markets

While the path may be strewn with obstacles, India continues to show relative strength and promise to the entire world. Continue to keep faith in the India story and let not the short-term setbacks bother you. The current issue thus promises to be full of ‘wealth-creating stories and ideas’. Do share your feedback with us.

RAJESH V PADODE
Managing Director & Editor