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Inverted US yield curve shows a recession is near, but it bodes well for Indian stock markets

Sushruth Sunder
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Even as we see a US Treasury yield curve inversion pointing to a looming recession, stock market experts say that the development is good sign for Sensex and Nifty. Yesterday, worries that the inversion of the US Treasury curve would lead to a future recession increased as 10-year yields fell to a fresh 15-month low at 2.34%.

According to Akhil Mittal, Senior Fund Manager at Tata Mutual Fund, there are concerns on growth slowing down and inflation is likely to remain anchored. Hence the central banks would turn dovish on monetary policy. US Federal reserve has already indicated an end to rate hikes and balance sheet reduction. All these developments have resulted in sharp fall in yields globally, explained Akhil Mittal in a note to Financial Express Online.

Also read: Share market LIVE: Sensex up 100 points, Nifty above 11,450; Jet Airways, Tata Motors shares slump

While yield curve inversion is generally seen as a precursor to recession it can also be a false signal driven by too much of positioning on one side of the market, explained Sandip Sabharwal. However the probability that the US Economy will slowdown along with Eurozone is greater and a more realistic possibility, investment advisor Sandip Sabharwal told Financial Express Online.

Impact on Indian markets

Noting instances from the past, technical analyst Milan Vaishnav of Gemstone Equity Research said that when the yield curve inverted in 2007, it lasted for several months. It was in the middle of 2007 that the 10-year yields rose higher than the 3-month again. During this period, both S&P500 and NIFTY gained in terms of value. However, after that, both these indexes saw a sharp 30-35% paring of values in the following months, he said in an interview to Financial Express Online.

Explaining further, Vaishnav said that while it may be a negative in the long-term, it may take several weeks for the result to show up. Hence, instead of reacting to this in panic, investors should use all future up moves to take out profits and protect all gains at higher levels. In a way, we can certainly say that all up moves that might occur going ahead from here might at as distribution on the charts, he added.

Likely RBI response

Sharing his insights on the likely trajectory of interest rates going forward, Akhil Mittal points out that with inflation remaining much below RBI target and growing concerns on growth, the market expects RBI to take a growth supportive stance. This would bode well for markets. With global conditions favouring flows into EM s, and RBI domestically expected to cut rates, the conditions should augur well for equity markets too as cost of funding would come down and liquidity would improve, he noted.

From the Indian context given the low global linkages the yield curve inversion should not impact economic growth much, and infact could be a positive as India needs rates to remain low to sustain a strong economy, noted Sandip Sabharwal. It could keep RBI on a easy money cycle for a longer time which we need at this stage as we have very high real rates of interest which are the primary factor behind below par economic growth in India, he said.