Repo rate at 7.0-7.25% is certain and soon!
The FY16 CPI forecast is at 5.0-5.50% and RBI's formula (to give decent inflation adjusted return to promote financial savings) for Repo rate setting is 1.75-2.0% over the CPI rate. This says it all without any ambiguity! The comfort is also from January CPI print at 5.1% and February print expected to be sub 5% from low prices of imported commodity items. Combination of stability in commodity prices, strong Rupee and absence of demand-push impact are good reasons to give medium to long term comfort for extended CPI relief into 4.0% (lower end of 4-6% comfort zone). The only risk factor is from the usual March (end of FY) syndrome - tight liquidity and temporary spike in near term money market rates before stability at start of FY16. Having said this, it does not make sense to sell long-dated Gilts (to lend in short term money market), when there is clarity of 30-40 bps upside from current level. Combination of CPI outlook and RBI formula, range for Repo rate through FY16 is 6.75/7.0-7.25/7.50%. This sets up immediate 25 bps rate-cut on or before 7th April policy review to shift 10Y bond focus range from current 7.70-7.75% to 7.45-7.55%. Beyond there, dynamics remaining unchanged, see Repo rate at 7.0-7.25% between July-September 2015 driving 10Y yield further down into 7.20-7.35%, seen as end of rally completing the chase from 8.50-8.65%. It is better for RBI to get this done soon, when Banks shift appetite from risk-off Gilts to risk-on credit.
All taken, despite pressure on Call money rate (causing negative carry for some time), it is good to stay invested at 7.73-7.75% (extension is God-sent) awaiting in patience for 7.45-7.55% ahead of 7.25-7.35%; it may not be an extended wait, though! For now, allow sideways at 7.68/7.70-7.73/7.75% before shift into 7.40-7.55% soon, not later than 1st week of April 2015.
Stay with the bull run riding the combined advantage of favourable demand-supply dynamics and rate direction.
Moses Harding
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