There is no surprise in Pranabda's election as 13th President with decent majority. But, post election events are not comforting. There is clear resistance from SP (Mulayam Singh) and TC (Mamta Banerjee) on FDI expansion. NCP (Sharad Pawar) is also now flexing its muscles. So, positive news on FDI - Retails is out of the radar; if it comes it would be a pleasant surprise.
There is no clarity on tax related issues - unwinding of retrospectiv tax; dilution in GAAR and cut in withholding tax. Governemnt needs to deliver these to avoid set up of disappointment.
The most crucial thing is price hike in diesel, kerosene and cooking gas. Crude oil price is already up and rupee is down. The impact on fiscal deficit is on the rise. Petrol prices are being hiked to reflect market moves. The benefit is marginal and it would need significant cost pass-through (in diesel, kerosene and LPG) to get meaningful impact on fiscal deficit (and consolidation). Will the FM bite the bullet despite resistance from within and outside UPA? There will be hue and cry; there will be demonstration by opposition parties who like to get mileage from this.
RBI may not be happy with this situation ahead of its quarterly policy review on 31st July. There will be upward pressure on headline inflation and effective retrun on money will be low. RBI does not consider current market dynamics as risk to growth but view this as major risk to investment and savings. With these guidance from RBI, it may not be prudent (and fair) for the Industry (mainly the borrowers) to expecct either rate cut or CRR cut from RBI on 31st July.
What is important will be the guidance on the way forward. Will RBI continue to stay hawkish or get comfort from expectation of consolidation in headline inflation at 6-7% in H2 and shift focus to growth to prevent sustainability below 6% in GDP growth. A combination of no monetary action and neutral stance on guidance will provide price stability post monetary policy.
Taking all these together, it would be in order to look for consolidation in 10Y Bond yield at 8.05-8.15%; 1Y OIS rate at 7.55-7.70% and 5Y OIS rate at 6.85-7.0%; range break-out, if any will be on higher side on risk of bullsih commodity and bearish currency.
Moses Harding
There is no clarity on tax related issues - unwinding of retrospectiv tax; dilution in GAAR and cut in withholding tax. Governemnt needs to deliver these to avoid set up of disappointment.
The most crucial thing is price hike in diesel, kerosene and cooking gas. Crude oil price is already up and rupee is down. The impact on fiscal deficit is on the rise. Petrol prices are being hiked to reflect market moves. The benefit is marginal and it would need significant cost pass-through (in diesel, kerosene and LPG) to get meaningful impact on fiscal deficit (and consolidation). Will the FM bite the bullet despite resistance from within and outside UPA? There will be hue and cry; there will be demonstration by opposition parties who like to get mileage from this.
RBI may not be happy with this situation ahead of its quarterly policy review on 31st July. There will be upward pressure on headline inflation and effective retrun on money will be low. RBI does not consider current market dynamics as risk to growth but view this as major risk to investment and savings. With these guidance from RBI, it may not be prudent (and fair) for the Industry (mainly the borrowers) to expecct either rate cut or CRR cut from RBI on 31st July.
What is important will be the guidance on the way forward. Will RBI continue to stay hawkish or get comfort from expectation of consolidation in headline inflation at 6-7% in H2 and shift focus to growth to prevent sustainability below 6% in GDP growth. A combination of no monetary action and neutral stance on guidance will provide price stability post monetary policy.
Taking all these together, it would be in order to look for consolidation in 10Y Bond yield at 8.05-8.15%; 1Y OIS rate at 7.55-7.70% and 5Y OIS rate at 6.85-7.0%; range break-out, if any will be on higher side on risk of bullsih commodity and bearish currency.
Moses Harding
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