Poll anx­i­ety, oil prices roil In­dian mar­kets


bond yield ended at 7.425%— a level last seen on 13 April— from its pre­vi­ous close of 7.441%.

Bond yields and prices move in op­po­site di­rec­tions.

“The an­nounce­ment of con­tin­ued open mar­ket op­er­a­tions to in­ject liq­uid­ity would com­ple­ment the im­pact of the re­cent de­cline in the US 10-year yield and some sta­bi­liza­tion in crude oil prices at a moder­ate level” said Naresh Takkar, man­ag­ing di­rec­tor and group CEO, Icra Ltd.

Takkar ex­pected the 10-year bond yield to trade in a band of 7.3-7.7% for the re­main­der of this quar­ter.

On Wed­nes­day, RBI kept its in­ter­est rates un­changed for the sec­ond straight meet­ing and low­ered its in­fla­tion pro­jec­tion sharply to 2.7-3.2% from 3.9-4.5% for the sec­ond half of 2018-19, tak­ing into ac­count the fall in food in­fla­tion, crude prices and ap­pre­ci­at­ing ru­pee. The cen­tral bank ex­pects in­fla­tion to rise to 3.8-4.2% in the first half of 2019-20. ravin­[email protected] (Bloomberg con­trib­uted to the story)

The Re­serve Bank of In­dia’s (RBI) de­ci­sion to main­tain sta­tus quo on the repo rate at the De­cem­ber mon­e­tary pol­icy com­mit­tee (MPC) meet­ing was no sur­prise. Given the de­vel­op­ments on the in­fla­tion front since the last MPC meet­ing in early Oc­to­ber, a largely dovish com­men­tary was ex­pected. Nev­er­the­less, the RBI’S com­mu­ni­ca­tion turned out to be ma­te­ri­ally more dovish than what we had an­tic­i­pated.

A key high­light of the MPC state­ment was the sharp down­side re­vi­sion to its con­sumer price in­dex-based in­fla­tion fore­casts. We had been an­tic­i­pat­ing a down­ward re­vi­sion to CPI to the ex­tent of 30-60 bps by the MPC in the De­cem­ber meet­ing. How­ever, the down­ward re­vi­sion to the MPC’S CPI fore­cast turned out to be a much sharper—more than 100 bps for sev­eral quar­ters, tak­ing the cen­tral bank’s CPI fore­casts now lower than ours.

The RBI’S com­mu­ni­ca­tion brought the em­pha­sis back strongly on data-de­pen­dent na­ture of mon­e­tary pol­icy. Gov­er­nor Ur­jit Pa­tel’s com­ments dur­ing the post-pol­icy in­ter­ac­tions that if the pos­si­ble up­side risks to in­fla­tion do not ma­te­ri­alise and the MPC turns more con­fi­dent about the per­sis­tence of low in­fla­tion, “there is a pos­si­bil­ity of space open­ing up for com­men­su­rate pol­icy ac­tions by the MPC” in the com­ing months re­main sig­nif­i­cant. This had been markedly dif­fer­ent from the cen­tral bank’s guid­ance in Oc­to­ber that the “stance of cal­i­brated tight­en­ing es­sen­tially means that, in this rate cy­cle, a rate cut is off the ta­ble”. While the MPC may not be keen to rush, after the lat­est set of com­ments from the RBI lead­er­ship, the pos­si­bil­ity of a rev­er­sal in mon­e­tary pol­icy stance to “neu­tral” in early2019 can­not be ruled out if in­fla­tion­ary pres­sures con­tinue to be soft. How­ever, in this con­text, we also note that the RBI’S re­vised CPI fore­casts are now sig­nif­i­cantly lower than our es­ti­mates. A siz­able un­der­shoot (60-70bp) from our cur­rent es­ti­mates in each quar­terly print is re­quired for the RBI’S es­ti­mates to be re­al­ized. That in­di­cates that the bar for a cut in the very near term may not be low ei­ther, in our view.

As re­gards liq­uid­ity, the cen­tral bank’s com­mu­ni­ca­tion also em­pha­sized that the RBI is ex­pected to con­tinue with its cur­rent en­hanced pace of open mar­ket op­er­a­tion (OMO) un­til March, a guid­ance just short of an of­fi­cial OMO cal­en­dar. If this pace is in­deed main­tained, the RBI will carry out OMO pur­chase of close to ₹3 tril­lion dur­ing 2018-19, more than 50% of the cen­tral gov­ern­ment’s gross mar­ket bor­row­ing dur­ing the year.

Over­all, the RBI’S com­mu­ni­ca­tion was sig­nif­i­cant. From sharply ton­ing down its in­fla­tion pro­jec­tions to as­sur­ing mar­kets of a size­able quantum of liq­uid­ity, the RBI pressed a markedly dovish set of but­tons. The gov­er­nor’s state­ment on “com­men­su­rate pol­icy ac­tions” can be read as some­thing that is squarely con­tin­gent on data de­vel­op­ments with­out rul­ing out any mon­e­tary pol­icy ac­tion over the com­ing months if the MPC gains greater con­fi­dence in ei­ther di­rec­tion. Thus, while the MPC did not change its stance for­mally, the De­cem­ber Mpc—es­pe­cially the post-pol­icy com­mu­ni­ca­tion—de facto brings the mon­e­tary pol­icy stance close to “neu­tral”. Thus, while we main­tain a cau­tious stance on mon­e­tary pol­icy given our fore­cast tra­jec­tory of CPI hov­er­ing in the 4.5-5.0% zone for a size­able num­ber of months dur­ing the lat­ter half of 2019, we shall be closely mon­i­tor­ing the evo­lu­tion of var­i­ous risks and their im­pact on in­fla­tion over the com­ing months.

Sid­dhartha Sanyal, chief In­dia econ­o­mist at Bar­clays

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