‘Central banks can’t sustain negative interest rates forever’

Global markets demonstrated a lot of volatility over Fed rate hike timing. Speaking to BTVi, Nomura India’s head of equities Prabhat Awasthisayseven if it does not happen in September, the next move for Fed probably is upward. Central banks might remain credible but the question is whether we should get more negative from here, or see some upward moving interest rates as the next move, he asks.

The central bank commentaries are once again rattling markets. How are you viewing these developments?

The rally post-Brexit was caused by the expectations that rates will be on hold. And the rally in bond markets followed globally, as well as in India.

If the uncertainty arises on that, it will clearly have an impact on markets because the rally essentially was a risk rally. If it changes that thought process, it will then cause volatility given the fact that we are at a very low level of interest rate wherein minor changes too can cause a fair amount of volatility.

The market rally has been driven by global liquidity. But how long can central banks continue with ultra-low rates?

There is no doubt about that. But the thing is that you essentially have priced in a certain level of risk when the markets have rallied. Essentially, valuations have moved up higher than their average sort of level in the last five or ten years.

But you have presumed a lower level of interest rate. The rally has been backed by global liquidity and the fact that the central banks have essentially put in exceptional amount of liquidity, and we have subsequently seen markets sustain at high levels globally despite much lower levels of growth.

Having said that, you are sitting on a level of interest rate that is very low. You might have a prolonged period of low interest rate, but eventually you will start seeing things otherwise at some point of time.

My point is that if you are already sitting at a very low rate, any changes in that for you at margin will make an impact.

The central banks might remain credible, but the question that arises is will you get more negative from here or you will probably see some upward moving interest rates as the next move?

Even if it does not happen in September, the next move for the Fed probably is upward. That is bound to worry global markets, whenever it happens.

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