Market hasn't factored in all US Fed rate hikes for 2023: Sameer Goel

In fact, the curve is now slightly inverted for 2024, he said, adding which is why the market still holding on to the narrative that this level of sharp tightening will raise the probability of a slowdown potential recession and for the Fed to have to sort of if he might unwind some of these rate hikes going into pretty fall.

“The immediate market reaction, you could argue, is a little bit of by the fact after having sold the rumor, in some sense except for obviously, that this lift off from the Fed has happened in the middle of a geopolitical war shock, if you might, to markets," he said.

Goel said the market reaction was a lot more muted. "This was mostly because the US Fed in effect admitted that it was behind the curve, as far as you know, with reference to its dual mandate. It actually adjusted its rate forecasts up, for 2022, very much to meet market pricing. It has also maintained that it would do QT concurrently with tightening, it is yet to give out its plans. It has also raised inflation forecasts," he said.

He said it's important to see that they have maintained the narrative that after the spike in inflation this year, it might be more persistent than in the past, but the trajectory still for inflation, to normalize down back in 2023 and 2024.

Goel said multiple factors are going in for the Indian rates outlook. "I think Crude is a very important factor. There is an exceptional level of uncertainty around the outlook on crude given that it's been driven by massive supply shock and fairly unclear about how persistent and how much more serious the supply shock can potentially be from here. That feeds in into the outlook on India very materially, given how big an importer of oil they are."

He said the the pressure is building up for a more significant pass-through potentially at some stage into local prices and into domestic inflation.

"The Reserve Bank of India (RBI), from that perspective certainly looks like one with significant negative real yields. At this point in time, a lot of the communication coming out of the central bank still suggests a relatively dovish stance where there is sort of a reluctance to move very quickly to recalibrate real rates into the positive territory," he said.

Goel said if anything, that will be a key determinant of how much the market price is in. "I would imagine the further RBI delays are tightening, the sharper tightening will be priced in into the curve,” he added.

The changes the US makes in its monetary policy also influence Indian markets. A rate hike motivates foreign investors to pull out their money from India and other emerging markets, and divert it back to the US for more secure and safer returns.

This capital erosion leads to the weakening of the Indian rupee.

The Reserve Bank of India, in such cases, resorts to rate hikes to stop the outflow of capital. However, the RBI has not increased rates for the 10th time in a row.

Talking about liquidity, Goel said the think price is important compared to the delta of stock liquidity.

US Fed rate hike: Market watchers say hawkish stance may see flows move out to other markets