One week is a long time in global banking. Or, so it seems if one goes by the latest inflation and interest rate commentary of the federal reserve Chairman Jerome Powell. The Silicon Valley bank collapse has almost caused a setting for a rapid reset of the interest rate trajectory in the US. Hiking rates further would clearly create far more systemic issues in the American banking system and this incident has sounded the alarm bells. It would be very difficult for the Federal Reserve to ignore the alarm and test the resilience of more financial institutions by undertaking further hawkish actions with interest rates. This runs contrary to what the Fed Chairman spoke just last week.
Now, the prospect of a softer approach to fighting inflation looms large and this could actually bode well for developing economies like India. The pressure to hike rates further will subside for developing economies. As better evidence of inflation subsiding emerges, developing economies would regain confidence and could even see a revival of investment flows into their economies. This could set off a virtuous cycle of good news.
Just a week ago, we could not have predicted the prospect of such a turnaround in the rate trajectory. The Federal Reserve Chairman Jerome Powell now has to come up with something different to tackle inflation without taking interest rates higher in a hurry. Now, we need to closely watch the fed commentary post the collapse of Silicon Valley Bank.
The need to calm the financial system down is very urgent and it will happen in the coming days. More importantly, as it happens, it will open up a new narrative and fresh expectations will get created. The stock market may be irrational in the interim phase and we would see a few opportunities arising out of the spreading fear.
These opportunities must be capitalised upon and investors must look to scale up their investment where they see valuations in favour. A crisis in one developed country could well be an opportunity in another part of the world.