Can RBI go the Fed-way next week? How to invest in a high-interest rate regime?

Usually, the Reserve Bank of India (RBI) raises rates in India to mitigate the impact of Fed hikes on foreign capital inflow and the rupee’s health. But experts still believe that the RBI may maintain a status quo on rates and keep the benchmark repo rate unchanged for the third time in a row in its upcoming bi-monthly policy review next week.

Why did the Fed resume hiking rates?

The Fed took a temporary pause in June to assess the impact of continuous hikes on the economy and the financial system of the US. It, however, resumed rate hikes since the economy still remains resilient and inflation has not fallen within its 2 per cent target level.

US inflation remains “well above” the central bank’s target of two per cent, said Federal Reserve Chair Jerome Powell in a post-policy press conference, adding that it will take time to bring price increases back down.

As Mint reported earlier, the Fed will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Read more: Fed meet outcome: 4 Key takeaways from US monetary policy

Can the RBI go the Fed’s way on August 10?

While the RBI may stay on the pause mode on rate hikes, the possibility of a rate cut is feeble now.

Deepak Jasani, Head of Retail Research at HDFC Securities pointed out that with the RBI keeping the repo rates unchanged at 6.5 per cent in its last two policies, the interest rate differential between India and the US has fallen to just 100 basis points.

Jasani does not expect India’s central bank to change interest rates or even stance in the next policy meeting scheduled during August 8-10, 2023. However, a marginal rise in the inflation forecast for Q3 and H2FY24 is likely given the upside risk due to the sharp price rise in vegetables and pulses.

“Apart from the rate rise by the US Fed, the RBI MPC will also have to consider the release by the Bank of Japan (BOJ) which announced steps to make its yield curve control policy more flexible,” said Jasani.

As VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services observed, “Even though Fed chief Jerome Powell had indicated the possibility of one more rate hike, he is unlikely to walk the talk since the disinflation trend is sustaining and there is a high likelihood of a soft landing of the US economy.”

In this context, Vijayakumar believes the RBI will play it safe by retaining the current policy rate and the stance of ‘withdrawal of accommodation. The CPI inflation will inch up a bit but will continue within the MPC’s tolerance limit.

Read more: RBI likely to keep repo rate unchanged during next MPC in August: Experts

Some analysts expect the RBI to be more hawkish now since inflation is expected to have picked up.

“RBI is expected to have a hawkish stance while keeping the interest rates unchanged. RBI will keep the commentary hawkish as there are risks arising from – a) the expected pick-up in inflation due to high food prices amid heavy monsoon rains, and b) the Fed hiking interest rates,” said Nitin Agrawal, CEO of Torus Oro PMS.

Read more: US Fed rate hike: How is it going to influence RBI?

Read more: Forget the Fed, and Focus on the Economy

How to invest in a high-interest rate regime?

Vijayakumar says in the high-interest rate scenario, a fixed-income investment may be done through dynamic bond funds.

Jasani is of the view that in a high-interest regime, investors can invest in instruments for a longer duration to lock in the high rates over a longer period.

“They can also look at investing in medium-term debt funds (including G-sec funds) so that they can benefit from NAV (net asset value) appreciation whenever the yields fall,” said Jasani.

Agrawal of Torus Oro PMS suggests investors can buy long-dated debt securities like gilts or gilt mutual funds. This could give them good interest rate carry and at the same time, they could make mark-to-market gains when the interest rates start coming down.

However, Agrawal pointed out that this investment could lose money if the interest rates keep going higher. On the equities side, one should look for companies with leadership positions which are able to maintain their margins and have low debt, said Agrawal.

Naresh Tejwani of Abans Group believes interest rates have peaked in India. However, Tejwani said interest rates are unlikely to start reducing soon or at least till the second quarter of the next financial year 2024-2025, as a result, current interest rates prevailing in the market offer good opportunities for those that intend to deploy their investible surplus for medium to long term,” said Tejwani.

Trivesh D, COO of Tradejini believes with consistent rates in the last two policies, it is an ideal time to invest in cash-rich companies, low debt-to-equity companies and insurance/AMC-based companies.

“This will yield better cash utilization in terms of the opportunity cost and increase the investors’ return. Additionally, banking stocks may see an uptick on account of an increase in capex cycles across various industries,” he said.

Manoj Dalmia, CEO of Proficient Equities Pvt. Ltd. said for those seeking to invest in a high-interest rate environment, should explore fixed-income investments like bonds as such investments tend to offer higher yields when interest rates are elevated. They can also consider investing in dividend-paying stocks with strong fundamentals. These stocks can provide a steady income stream, irrespective of stock price fluctuations, Dalmia said.

Shrey Jain, Founder and CEO of SAS Online said for investors aiming to capitalise on the current opportunity, a favourable approach would involve investing in high-rated bonds and debt papers.

Alternatively, Jain said those who have a strong inclination towards equities can consider exploring interest-sensitive sectors, defensive sectors, and dividend stocks as a well-balanced and promising investment mix.

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Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before taking any investment decisions.

Updated: 01 Aug 2023, 02:31 PM IST