Saurabh writes the Fed endgame and its impact on India.http://marcellus.in/blogs/marcellus-the-feds-accommodation-of-wall-street-endgame/
We see three layers of impact playing out:
- 1. The immediate consequence looks likely to be a shift in lending market share from the NBFCs to private sector banks (especially private banks with strong CASA franchises). Given the issues already plaguing the wholesale money market in India (IL&FS, Essel, Debt mutual funds’ challenges, etc) this shift in market share in favour of private banks is already underway. A sustained rise in the US 10-year bond yield could make this shift more long lasting.
- 2. The medium term consequence looks likely to be a rise in household financial savings (India’s household savings rate has fallen sharply from 25% in FY10 to 17% in FY17) and a drop in discretionary consumption (which has boomed over the last decade). Such a shift could create further issues for sectors like residential real estate and auto. The challenge could also extend to next rung down of discretionary consumption eg. electricals, consumer durables. On the other hand, the rise in household financial savings should help India’s banks (most of whom are struggling to attract deposits).
- 3. The longer term consequence looks likely to be a drop in the price of land, real estate and fixed assets as the world and India gets accustomed to more expensive capital. (On this issue, my colleague, Salil Desai has written an interesting piece: http://marcellus.in/blogs/marcellus-three-degrees-of-disruption-in-home-buying-in-india/) It is hard to gauge the full consequences of such a readjustment in fixed asset prices. Perhaps it will lead to a renewal of interest of gold as a safeharbour asset. Alternatively, it could lead to greater household financial savings as highlighted in the preceding bullet.