Lack of comfort on inflation with the need to maintain decent real rate of return:
RBI is definitely not in cheer to deliver 2 successive rate cuts in less than 20 days! The reason is attributed to retain operating policy rate at 1.5-2.0% spread over the expected CPI inflation, seen by RBI steady around 6%. This sounds logical, but the worry is from lack of optimism on the guidance with outlook for favourable trending into the lower end of set comfort zone of 4-6%. The hope of next baby-step 25 bps rate-cut is now shifted to post Budget 2015 in the first week of March 2015 for end of FY15 Repo at 7.5%!
The sweet coat on the bitter pill is the 50 bps cut in SLR from 22% to 21.5%, retaining HTM at 24%; expect HTM reduction at 23.5% retaining 2% concession. When the draw down from Repo counter is not significant to the excess SLR held by Banks, SLR cut is non-event, seen as guidance to shift appetite from risk-off Gilts to risk-on productive credit.
All taken, RBI's concerns (and worries) on Rupee-Interest rate dynamics is not diluted, on the back drop of strong dollar (against global currencies) and downside risks on global economy (and risk-on financial assets). The intent is not to squeeze the rate differential between India and rest of the world, which could dilute FII appetite for India bonds and build bearish momentum on Rupee.
It is another month of market stability; NIFTY at 8650/8700-8850/8900, 10Y bond at 7.65-7.75% and Rupee at 61.25-62.25. The attention will now be on Budget 2015 (watching growth - fiscal deficit dynamics) and January 2015 CPI print (watching trend down into lower end of 5-6%); if all goes well, expect Repo rate reduction to 7.5% in March and providing clarity on the timing of next round of reduction into 7% during April-September 2015.
Nothing to panic, the dust has settled now for rest of February (ahead of Budget 2015) driving financial markets in consolidation mode!
Moses Harding
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