India is safe from any economic risks despite the failure of two US regional banks, HDFC Mutual Fund has said in a report. It has, nevertheless, suggested that the dollar could strengthen against the Indian rupee in the near future.
RBI will pause rate hikes and wait till June 2023 in an uncertain global environment, the report titled Fixed Income Outlook – Time To Accumulate, said, adding that considering the flat yield curve and elevated absolute yields across the board, investors should increase the duration on fixed-income portfolios.
“There seems to be a very limited risk of a similar event happening in India considering the stringent regulations around liquidity coverage ratio, HTM investment proportion and capital adequacy requirement,” the report said.
HDFC Mutual Fund said that prior to the pandemic, Indian banks underwent a multiyear clean-up exercise, and their balance sheets are in a healthy shape.
“Risk-off sentiments triggered by these events are likely to result in the dollar strengthening against most currencies, the rupee. Thus, in a highly uncertain global environment, there is a strong case for the RBI to pause the rate hike and wait till June 2023 to decide upon a future course of action,” the report further said.
“We believe there is a strong case to increase duration on fixed income portfolios by investors considering the flat yield curve and elevated absolute level of yields across the board. Hence, it’s time to accumulate,” it added.
The report said that due to the failure of the two regional banks in the US failure, the US Federal Reserve rate peaking at 5.75 per cent for CY23 will not happen.
“The rates will be cut by 100 basis points starting June 2023,” the report said.
It further said that due to the turmoil in a large European bank, addressing financial stability risks is likely to be a priority for global central banks rather than focusing solely on inflation.
As tremors are also felt by European banks due to turmoil in Credit Suisse, there is a fear of contagion risk spreading, it added.
“However, policymakers in US and Europe took aggressive steps to support the financial system by allowing access to liquidity and assuring deposit holders of their full support which soothed the market nerves. Admittedly, the immediate fallout of bank failure seems to be contained, but the risk of similar events happening persists and can have a profound impact on growth and sentiments,” it further said.