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