Attractive returns despite interest rate uncertainties

Express Money

We believe 2013 will be a year of moderate global growth; however, some divergence will be seen at a country level with some experiencing recession and others growth.

Economic policies monetary and fiscal will be the catalysts for financial markets. With policy rates in major developed economies already close to zero levels, central banks are expected to remain in an expansionary mode. In the US, underlying economic indicators are improving. Signs of recovery in the housing market and positive earnings results have provided an impetus to financial markets.

However, the key risk to outlook in the near term is the uncertainty over fiscal policy. Although a last minute deal avoided significant budget cuts in January, there are still key issues to be addressed.

In Europe, ongoing austerity coupled with tight financial conditions, structural reforms and uncertainty could result in lower growth particularly in peripheral countries. Although bond yields in these countries have fallen sharply, domestic credit conditions remain quite strained. Meanwhile, Japan has re-entered recession. The new administration in the country has been aggressive on monetary policy. The Bank of Japan has committed to a new 2 per cent inflation target and announced a large asset purchase program. In China, after last year's slowdown, growth seems to have picked up and economic indicators suggest a mild rebound in economic growth. However, the upcoming leadership transition and restrictive property policies lend an uncertainty in the short term.

Coming back to India In line with our expectations, the Reserve Bank of India lowered repo rate by 25 basis points, but somewhat surprisingly also lowered the cash reserve ratio by 25 basis points in its third quarter review of the monetary policy on January 29. However, more importantly, the central bank tempered market expectations of a series of rate cuts, by drawing attention to a range of factors other than just the wholesale price inflation which has moved lower over the past few months.

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