With our current fixation on US interest rates, investors may have taken their eye off the domestic interest rate scenario.
This was, after all, perceived to be the biggest threat to our equity market till only a few months back. While no one expects rates to harden meaningfully from here, it's very pertinent and material to ask when they will start coming down. In India, not in the US.
This could potentially be one of the triggers which sparks off the next leg of the bull run. Admittedly, there are headwinds now, in the form of global uncertainty, slowing growth and politics. As and when these get resolved, the market could find a trigger in an easing interest-rate cycle. It may have to wait for a bit though. The country's largest private sector bank says there is little possibility of any rate cut till March 2008. That's an interesting take. The contention is that inflation fears remain and in a scenario of midterm polls in 2008 the government can hardly take chances with escalating prices.
What the US does with rates is also important, on the margin. If the Fed were to cut, say only 50 bps over time and leave it there, that may not be reason enough for the RBI to make a move. In case of a series of rate cuts there coinciding with no further rate increases in Europe or Japan, the RBI may gently start the easing process. After all, it seems to have achieved what it set out to do. Credit growth has moderated to that 20-22 per cent band and the recent IIP numbers are telling.
The situation is particularly interesting and complex as one size does not fit all in the global interest-rate game. While the US has a definite problem with it's economy and has little recourse but to cut rates, the situation in other parts of the world is different. China has been steadily increasing rates to curb runaway growth and inflationary pressures, Europe doesn't have a major economic problem and Asia ex Japan certainly does not. Our economies are growing fast and the biggest challenge for central banks here is to manage this growth, huge liquidity inflows and inflation. So, it's hardly a "if the US cuts rates, we will follow" kind of situation.
Yet, by the time the dust settles, one way or the other in the US, by say early 2008, hopefully the good doctor will shift his foot from the brake to the accelerator again. The stock markets wait expectantly.
(The writer is Executive Editor, CNBC-TV 18)