The rapid shift in rate expectations is indicating that the global economy is heading towards a higher-for-longer rate hike cycle. This change is also impacting the valuations and flows in the emerging markets (EMs), with foreign investors flocking to these markets in search of relatively higher yields.

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In an interview with CNBC-TV18, Manishi Raychaudhuri, Asian Equity Strategist, Equity Cash Asia Pacific at BNP Paribas, said that the market is preparing for a higher-for-longer rate hike cycle. This change in expectations has been rapid, and the rate expectations have now risen to 5.5-5.75 percent, indicating the market's belief that interest rates will remain higher for an extended period.

He said, “The market has now come to terms with this expectation that the Fed would actually raise somewhere around 5.75-6 percent and possibly stay there till the end of this year. And this change has been rapid, it has been remarkable over the past 5-weeks or so.”

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According to him, The rapid shift in rate expectations has been driven by several factors, including the recent inflationary pressures that the global economy is facing.

Meanwhile, Ayaz Motiwala, QRC Investment Advisors at Nivalis Partners said that the market was previously expected to be past the rate hike cycle by Q3. However, the rising inflation levels are now indicating that the numbers are 50-100 bps higher than earlier estimates. Furthermore, inflation seems to be higher and stickier than earlier predictions.

The market's shift in rate expectations is also affecting the valuations and flows in emerging markets (EMs). As the interest rates in the developed markets rise, investors are beginning to shift their focus towards EMs, which offer relatively higher yields. Raychaudhuri stated that this trend is reflected in the flows, as the EMs are witnessing a surge in capital inflows from foreign investors.

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However, the shift in rate expectations and the resulting impact on the EMs are not without risks. As interest rates rise, the EMs' borrowing costs increase, leading to higher debt-servicing costs for these countries. Additionally, a sharp increase in rates could lead to currency depreciation, further exacerbating the borrowing costs.

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First Published:Mar 9, 2023 1:00 PM IST