Vetri Subramaniam, the chief investment officer of UTI Asset Management Company, said the United States may be seeing a ‘regime change’ in terms of interest rate policy under which the US Federal Reserve may keep its rates higher on a long-term basis.
This will, in parallel, be accompanied by fiscal policies — such as enhanced welfare — to cushion the vulnerable sections of the population from the impact of such high rates, he pointed out.
Until now, the US central bank used to keep the interest rates low to ensure that businesses got access to cheap credit, which — it was assumed — would be used by them to invest and generate jobs.
However, nearly 15 years of low interest rates led to the build of an enormous amount of liquidity in the global market, which in turn led to a spike in the prices of assets, at first, and later, the prices of ordinary items.
High inflation in the prices of essential commodities such as food and fuel has forced the central bank to raise rates at the fastest pace in several decades from around 0.25% to 5.25% in a little over a year.
“The country [US] seems to have now decided that this is actually a policy mix that is working quite well for them, which is to say they are trying to tackle inflation with higher rates, but it’s not causing any pain in the economy in terms of job losses, it’s not causing pain in terms of going into a recession,” said Subramaniam.
He pointed out that the US seems to have stumbled onto a new model where they can keep rates high but also cater to the needs of electorally sensitive segments of the population through generous government schemes. The Biden administration had, for example, in December passed a whopping $1.7 trillion bill to boost infrastructure spending in the country.
“They have now discovered that they can keep the fiscal deficit significantly higher than where it used to be..to make sure that they are able to take care, both of certain sections of the economy as well as of the political economy mix.
“What we are seeing is a regime in which monetary policy stays tight, but fiscal policy is used to support certain sections,” he said.
He pointed out that this changes the ‘thought process’ about what to expect in terms of interest rates in the world’s large economy, including the yield on long-term treasury bonds such as the US 10-year.
“If the US government stays on the current trajectory, then it’s hard to see their issuances [of debt] come down, and therefore, very hard to see the long-term rate come down very significantly,” he added.
This could have an impact on Indian stock markets, Subramaniam added. The Indian stock markets have been volatile after foreign funds started withdrawing their investments in August, after positive inflows in June and July.
However, he said, it won’t be a straight comparison, as India’s economic fundamentals are strong.
“There could be significant down0graph for valuations in US [stocks]…certainly some of that down-graph for valuations in India as well. It’s just the mathematics of how we value an enterprise, which is the value of the cash-flows accruing to the company,” he added.
On this, he said, India’s PE multiples are higher compared to historical averages, and we might see a moderation in the same.