Central banks may reverse rate hikes in 2023 to escape slowdown: SBI

Financial markets in 2022 have remained volatile and edgy with the central banks globally in unison in a rate hike cycle

Central banks across the globe may unwind the key interest rates as inflation starts to cool down and prospects of a slowdown become starker, the State Bank of India (SBI) said in a report, according to IANS.

"With the prospect of a global slowdown, the central banks in different countries may unwind the rates as inflation comes off the boil and slowdown starts to bite," the report said.

Policymakers worldwide are faced with the challenge of controlling inflation without harming the economy and financial markets. The markets in 2022 have remained volatile and edgy with the central banks globally in unison in a rate hike cycle.

The report said a higher cost of capital, and thereby lower operating margins, impacts the growth as well as competitive landscape favouring established market players than the new entrants.

"In fact, this is in complete contrast to the post-global financial crisis in 2008 when all central banks had cut rates in unison, but central banks in respective countries decided to take an exit from easy monetary policy separately, India included," the SBI said.

Equity and bonds are expected to become less correlated when the economic cycle slows. Challenges for investors also increase when both bond prices, as well as equity prices, fall together.

Allocation to fixed income in the current year has been a challenging area as the low yield on government bonds lowers its ability to offset losses incurred by investors during bear markets.
 

Equity markets factor news, positive or negative, to reasonably value stocks. Investors tend to choose asset allocation in equity markets by comparing yields derived from short-duration as well as long-duration government securities, the report noted.

While the Indian equity markets were volatile in 2022, a granular look at the data reveals that both in terms of returns and volatility, they had logged in the best performance on a relative scale, according to the SBI report.

(With agency inputs)