Central banks across the world may unwind the interest rates as slowdown starts to bite: SBI report

• Central banks in different countries may unwind the rates as inflation comes off the boil and global slowdown starts to bite.
• Policymakers have to control inflation without harming the economy and financial markets.
• Equity and bonds are expected to become less correlated when the economic cycle slows.

With the prospect of a global slowdown, the central banks in different countries may unwind the rates as inflation comes off the boil and slowdown starts to bite, the State Bank of India (SBI) said in a report.

According to the report, policymakers have to control inflation without harming the economy and financial markets.

Higher cost of capital and thereby lower operating margins impact the growth as well as the competitive landscape favouring established market players over the new entrants, the report said.

Financial markets in 2022 have remained volatile and edgy with the central banks globally in unison in a rate hike cycle.

"In fact, this is in complete contrast to the post-global financial crisis in 2008 when all central banks had cut rates in unison, but central banks in respective countries decided to take an exit from easy monetary policy separately, India included," the SBI said.

According to the report, equity and bonds are expected to become less correlated when the economic cycle slows.

Challenges for investors also increase when both bond prices, as well as equity prices, fall together.

Allocation to fixed income in the current year has been a challenging area as the low yield on government bonds lowers its ability to offset losses incurred by investors during bear markets.

Equity markets factor news, positive or negative, to reasonably value the stocks. Investors tend to choose asset allocation in equity markets by comparing with yields derived from short-duration as well as long-duration government securities, the report notes.

While the Indian equity markets were volatile in 2022, a granular look at the data reveals that both in terms of returns and volatility, they had logged in the best performance on a relative scale, the SBI said.

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