Despite the anticipated tightening, the domestic economy is unlikely to suffer a material slowdown. The banking system is currently in its best macroeconomic shape in recent memory, supporting a robust credit creation multiplier. As Indian economic growth is driven largely by investment rather than consumption, it remains relatively insulated from interest rate sensitivity. “I think three hikes is enough to probably at least start to cap inflation but also not cost too much on the growth side,” Yetsenga said.
Higher domestic rates will help alleviate some pressure on the currency, though the US dollar is expected to remain bid against the rupee for the next six to 12 months. On the broader economic front, top-line growth continues at a strong 7% annual pace—putting the economy on track to double every decade—even as underlying K-shaped labour market trends show concerning unemployment levels among graduates.
Shifting to global markets, the recent multi-decade highs in US Treasury yields stem from a massive refinancing burden, heavy capital demands from the artificial intelligence sector, and an unsustainable fiscal position. This price action has temporarily disassociated from oil, with yields climbing even as Brent crude prices fell by $3 to $4 per barrel. The US Federal Reserve will likely implement at least two more rate hikes to force the necessary economic slowdown required to return inflation to its 2% target. While the technology sector might absorb a 100-basis-point increase, non-tech industries will face a sharper deceleration.
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The bear move across the US yield curve is nearing its peak. Current yield levels present an attractive entry point for asset managers, as the duration math makes capital losses less likely from here. Rather than an outright freeze on yields, the US administration is expected to lean into financial repression, evidenced by the Treasury tripling its buyback programme, to manage the enormous scale of its structural challenges.
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