RBI less hawkish than expected; rate hike likely only in H2 of this calendar year

作者:Demi    發表日期:2019-08-15 11:30:39

B Prasanna


The backdrop of the monetary policy was marked with a confluence of factors - hardening of global bond yields, an intensification of upside risks to domestic inflation and a budget that had slipped on fiscal consolidation and one that was perceived to be inflationary. The run up to the policy hence had caused a significant amount of anxiety among market participants.

date = new Date(); date.setTime(date.getTime()+(1*24*60*60*1000)); $.cookie("dfp_cookie_article", "Y1", {expires: date,path:"/",domain: ".moneycontrol.com"});

However, the Reserve Bank of India (RBI) surprised by being less hawkish than expected.

date = new Date(); date.setTime(date.getTime()+(1*24*60*60*1000)); $.cookie("dfp_cookie_article", "Y1", {expires: date,path:"/",domain: ".moneycontrol.com"});

related news

Walmart eyeing majority stake in Flipkart taking valuations to $20 billion

Flipkart offers special discount on Samsung products, Galaxy S7 available at Rs 22,920

See substantial launches in Q4FY18; HDFC deal to bring more capital: Prestige Estates

While after the last policy the debate was whether the RBI was implicitly communicating a prolonged pause, this time it seemed that a case has been built to be vigilant and for the need to act if upside risks to inflation materialises significantly. The Monetary Policy Committee (MPC) let out no urgency to act on rates immediately.

The MPC noted a range of upside risks to inflation and the concerns manifested in the higher projections for inflation for Q4 FY2018 (5.1 percent ) and for FY2019 (5.1-5.6 percent H1 and 4.6-4.7 percent H2). Our own projections are also on similar lines with FY2019 inflation likely peaking in June 2018 at ~5.6 percent YoY and then moderating over the rest of the year to end at ~4.5 percent YoY.

The major source of uncertainty in the factors that were outlined by the RBI is that of Minimum Support Price (MSP) hikes as there is no clarity yet as to how the government intends to implement this measure.

What was surprising is that MPC chose to somewhat soften the otherwise hawkish assessment on inflation by acknowledging some mitigating factors such as low capacity utilisation, the possibility of decline in crude prices from current levels, moderate rural wage growth and the need to 「carefully nurture」 nascent growth recovery.

The stance for policy decisions was also retained at 「neutral」. This leads us to believe that MPC would want to wait for longer before actually hiking rates in response to rising inflation pressures.

On the liquidity front, the communication from RBI remains very specific and it was reiterated that open market operations are linked to forex triggers and hence effectively rules out any market expectation of buyback of bonds.

We think the possibility of a rate hike has now firmly shifted to the second half of this calendar year unless the next couple of inflation readings surprises on the upside.

Market and global factors

Markets have seen a positive reaction to the policy as near term fears of a rate hike were allayed. Yields at both the short and long end including derivatives trended lower on a less hawkish outcome.

However, in the absence of any major domestic trigger over the next few months, markets are likely to track global factors such as major Central Bank policies and oil prices.

In the medium term, robust growth prospects domestically and globally, rising inflation, elevated commodity prices and increased normalisation by major Central Banks leading to higher global bond yields are likely to continue to weigh on sentiment.

The breakdown of liquidity in the secondary market, lack of interest shown by banks in primary auctions and the worsening demand-supply situation for next year will also have a bearing.

In other welcome developments, the RBI has now allowed more flexibility for non-residents for hedging purposes. These entities are now permitted to dynamically hedge their current account or capital account exposures and also access onshore hedging options for interest rate exposure including Masala bonds.

These steps will generate more liquidity and help to broaden and deepen Indian markets.

(The author is Group Executive, Head- Global Markets Group, ICICI Bank)