What a turnaround of events in the last about six weeks as far US bond yields are concerned. On 3 December 2018, it traded at 3.05, tested as low as 2.54 on January 4 and trades at 2.69 at the time of writing. (Refer below the 10 Yr US bond yield movement from 3 December 2018 – Till Date)
On 21 December, I wrote an article titled “Trump: You Spoilt My Christmas, Powell” where I mentioned how angry Trump was in respect to hiking interest rates by the Fed and how all his tweets were being ignored.
Last US Consumer Confidence Index data on 27 December stood at 128.1, down from 136.4 in November. It was a very disappointing data as consumers’ optimism about the short-term future fell. Followed by this on January 4, Fed Chairman Powell said that the central bank “wouldn’t hesitate” to adjust how quickly it lets its balance sheet shrink if it starts to cause problems in financial markets.
Powell also said that the Fed “will be patient” with monetary policy as it watches how the U.S. economy performs. Then FOMC meeting minutes on 10 January almost sealed the chances of any rate hike by Fed at least in the first half of calendar 2018 (until something very dramatic happens) . The minutes noted that the low-inflationary backdrop means the Fed can “afford to be patient about further policy firming. So Trump’s tweets did work albeit with slight delay!
Minutes also highlighted the possibilities of a sharper-than-expected global economic slowdown, a more rapid waning of fiscal stimulus, an escalation in trade tensions, further tightening of financial conditions.
Now, coming to the moot point, the impact of it on India. The most likely scenario is that Fed will pause in the short to midterm whereas RBI may consider lowering the Repo rate in the midterm. India’s annual retail inflation rate dropped to an 18-month low of 2.19 % in December 2018, annual wholesale inflation rate eased to an eight-month low of 3.80 % in December and industrial output growth declined to 0.5 % in November.
All these data points clearly indicating that India’s economy is slowing dragged down by reduced growth in consumer spending and weak growth in the farm sector. Added to it is the political uncertainty, as India will have its general elections in the next 3 to 4 months’ time.
Fed pausing and RBI easing will lead to a hike in interest rate differential between US and India favouring the US currency against INR. The probability of a weaker Rupee is very high in the near to midterm and I would not be surprised if this time it breaches its all-time low of 74.50 against USD.