bolt from the blue from the RBI

Preference for headline inflation over growth and less optimism over Government’s initiatives

It was not unfair on the part of market stake holders to expect minimum 50 bps cut in CRR and 25 bps rate cut. SBI Chairman, the biggest stake holder had highlighted the economic need for 100 bps CRR cut and 50 bps rate cut. The reasons for such expectations were many: core inflation down below 5%; definitive downtrend in fuel price inflation on 25% fall in BRENT Crude price; Government’s assurance to address food price inflation through supply side measures; sharp downtrend in GDP growth into 5% and so on. Moreover, RBI had already delivered a “pleasant surprise” on 17^th April through 50 bps rate cut against market consensus. There are no significant developments since 17^th April to deliver “unpleasant surprise” through reversal of stance against market consensus. Now, stake holders will analyse reasons for this behaviour. It may be that RBI is now concerned on elevated headline inflation and await Government’s measures (and actions) to ease pressure on food and fuel price inflation before taking a firm growth supportive monetary stance. Will it be due to change of guard at the ministry to get more clarity on its actions on fiscal consolidation and food price inflation? The only consolation was increase in export finance limit from 15% to 50% which can be seen as MSF at Repo rate, but this support is not very relevant when its usage is not significant by most Banks. The post-policy impact on the markets was not a “surprise” for sure. Short term money market rates are up; Bond yields up, rupee down and equity market down. Over all, bullish expectation into the midterm policy review and the resultant rally across asset markets is now fully undone!

What next? 3-12M money market rates is now back at 9.25-9.75%; 10Y Bond yield at 8.35-8.50% (8.79% 2021) and 8.10-8.25% (8.15% 2022). Rupee is back to its bearish trend having taken out strong support at 55.65 and NIFTY into consolidation mode above 5000. RBI action will be disappointment for off-shore investors (who were invested in debt/equity assets to “ride” the shift to pro-growth stance) who may now either get into wait-and-watch stance or exit the scene where feeling the pulse is difficult. Let us now stay tuned to domestic economic data and signals from external sector. It is not the time to stay invested and we stand aside for more cues into the future. Till then, watch consolidation in 10Y (8.15% 2022) Bond yield at 8.10-8.25%; 5Y OIS at 7.20-7.45%; NIFTY at 4700-5200 and USD/INR at 55.30-56.50 not ruling out extended weakness across all asset markets. The strategy is to stay invested on extended weakness outside the set ranges for run into July quarter policy review.

Good luck.....................Moses Harding