Inflation is expected to “more meaningfully come off and growth is likely to slow and stabilise in the summer months”, according to UBS’s Asia Equity Strategy report.
”... We think the world has slowed down, Asia with it, and that in Asia, especially for China and India, inflation is very close to peaking in the coming months,” the report said, adding this would result in the “potential for policy tightening to temporarily come to an end.”
However, the need to raise policy rates one more time still exists, with UBS India Economist Philip Wyatt predicting one last rate hike at the RBI’s July 26 meeting, since inflationary pressures still loom large.
Indian inflation has been stubbornly high since mid-last year and despite repeated rate hikes by the RBI, has not yet really stabilised, the report said.
The central bank has since March, 2010, raised key interest rates ten times, with the latest hike effected on June 16 when it hiked short-term lending and borrowing rates by 25 basis points each to 7.5 per cent and 6.5 per cent, respectively.
Headline inflation in May stood at 9.06 per cent, which is more than 200 bps above the RBI comfort zone, while the food inflation rate decreased to a one—and—a—half month low of 7.78 per cent for the week ended June 18 after rising consistently through the previous month.
UBS further said going forward, liquidity conditions are likely to improve, as slower growth will reduce loan demand.
Besides, the political logjam caused by last year’s scandals might slow infrastructure spending considerably in the second half of the year.
“Given that infrastructure loans have been accounting for about 45 per cent of loan growth, any slowdown is likely to lead to a meaningful reduction in net loan demand,” UBS said.
Equity markets are likely to rise in the coming weeks as some of the fears that dragged the markets lower gradually ease.
The report said markets are “likely to go higher from here, not lower” as the major challenges to the sentiment one by one become less challenging, especially Greece for now.
“We think if there is any indication that policy headwinds are easing for China and India, these two markets, given their current valuations, will look more attractive,” the report said.