RBI Policy Effect on Markets
1. 7.17% 2028 gsec in 7.405% to 7.60% range
2. INR range of Rs 63.75 to Rs 64.45
3. Sensex and Nifty to stay volatile on global market volatility
The MPC (Monetary Policy Committee) voted 5-1 to keep policy rates neutral with lone negative vote of Dr. Michael Debabrata Patra going in favour of a 25bps rate hike. The outlook for further policy actions would depend on trajectory of inflation over the next fix months.
RBI upped its inflation estimate for the January-March 2018 period to 5.1% from 4.3% to 4.7% range as previously estimated. Inflation expectations for the first half of fiscal 2018-19 is 5.1% to 5.6% and for the second half is 4.5% to 4.6%, GVA growth is estimated at 6.6% for FISCAL 2017-18 and in range of 7.3% to 7.4% in first half of next fiscal year and 7.1% to 7.2% in second half.
Inflation risks are on the upside but growth expectations and improved and needs to be nurtured, as per the RBI. This statement should clam nervous bond markets, that have been hit on many sides with 10 year government bond yield rising by over 50bps since last policy in December 2017. Rising 10 year UST yields, RBI upping inflation expectations, government slipping on fiscal deficit targets and rising oil prices globally have hit bond market sentiments hard.
Going forward, 10 year gsec yields are likely to stay around 7.5% levels with a range of 7.40% to 7.60%. Markets will take fresh direction in end March on borrowing calendar for next year and on incoming economic data.
RBI in its turn will be in a liquidity management mode, given ups and downs in system liquidity on the back of rising government cash surplus. On the currency front, fx reserves at USD 420 billion is at all time highs and RBI has forward currency purchase position of USD 30 billlion, which can cushion any short term risk aversion impact as well as provide latent liquidity of over Rs 2 trillion.
The central bank did not mention on its plan for governemnt borrowing next year, given that it has been forced to reject bids in three of the last four auctions. As per our estimates, RBI would require to step in to buy Rs 1000 billion of bonds next year, given banks lack of appetite for bonds, Read our note on Government Borrowing and Fiscal Deficit for 2018-19.
On the inflation outlook risks are 2nd round of HRA increases by state governments, faster global growth pushing up commodity prices, MSP policy of government, customs duty hikes, fiscal slippages and confluence of fiscal deficit widening with tightening of policy by global central banks. while risk mitigating is in form of outut gap, oil prices coming off and rural wage growth staying at moderate levels.