US Federal Reserve policy
How are the Indian and global economic environments affecting the financial markets?
Global financial markets, including India’s, fearing a global economic slowdown have dropped in the aftermath of the US Federal Reserve’s signals at its most recent meeting to hold interest rate increases and slow down its process of balance sheet normalization. This appears to be a reaction rather than a considered move on the part of the markets because ex ante central bank support worldwide in response to the slowing global economy should, in fact, be encouraging: the economic policymakers do not intend the world economy to slip into a recession especially after all the hard work since the financial crisis and the Great Recession. The Reserve Bank of India (RBI) policy is in sync with the rest of the major central banks. Signals such as the yield curve inversion in the United States do not signal an imminent recession but only the probability that, if monetary and fiscal policies stay status quo, a recession could happen in 12-24 months from the date of inversion. The global central banks are ahead of the curve and accommodative monetary and fiscal policies could transmit into the economy averting a recession.
What to expect from the markets next week?
The fact that the major central banks of the world are now all supporting growth in 2019, the Indian financial markets will look to corporate performance in the last quarter of fiscal 2018-19 when earnings reports begin to be released in April, getting over their initial knee jerk negative reaction last week to the global central banks’ acknowledgment that the world economy is slowing. Indian financial markets could continue to be beneficiaries of Foreign Portfolio and Institutional Investments given the relatively low interest rate environment in US, Europe and Japan.