RR stood firm on inflation control
RBI delivered to expectations keeping policy rates unchanged taking comfort from affordable cost of short term sources of funds. Given the abundant system liquidity, RBI chose not to cut CRR and SLR in the absence of desired demand for use of funds.
RBI retained FY16 growth target at 7.8%, bit unrealistic though, but stayed cautious on inflation retaining January 2016 outlook neutral at 6.0%. RBI did send positive vibes from setting March 2016 CPI target at 5.8%, stance seen as cautiously optimistic on the way forward with limited confidence. It is non-event with no clear guidance on the way forward, hence the post policy price stability. While the rate cut hope is retained, the timing of the next rate cut is anybody's guess between October 2015 to March 2016 if not beyond. One thing is seen for sure, chance of rate cut in October - December 2015 is remote against January - March 2016 CPI target at 6.0-5.8%, already at 1.25-1.5% spread against Repo rate of 7.25%. The best case is for Q1/2016 if January CPI eases below 6%, building case for review of March 2016 target at/below 5.5% creating bandwidth of 25 bps cut ahead of end FY16. This is however dependent on Brent Crude stability at $45-60 and firm Rupee at 63.50-64.50. By then, FED would have delivered 50 bps rate hike. All combined, it is not a great-feel policy despite providing feel-good outlook of ease in CPI inflation beyond January 2016.
The positive take away however is the pipeline efforts to strengthen the financial system to ensure smooth flow of liquidity to funds starved core sectors of the economy. The focus on capital infusion, NPA resolution and efforts to dilute credit risk aversion is immediate need of the hour. All taken, RBI has reinforced its comfort on liquidity and cost of liquidity while taking desired steps on diversion of liquidity from risk-off Gilts/AAA corporate debt/investments to risk-on infrastructure, manufacturing and agriculture sectors, which is critical to guide step up growth momentum over 8% by end of FY16.
Limited clarity ahead on markets - bulls and bears on crossroads
The policy tone leaves neutral undertone on markets. Retain NIFTY focus at 8400-8650 (within 8250-8850) while 7950 and 9150 is distant away from the radar. Bank NIFTY gets RBI and Government support for shift into higher range focus at 18500-19500 not ruling out downside bias into 18000.
India 10Y bond is under pressure from shift of RBI rate cut beyond October 2015 and FED start of rate hike by September 2015. The demand - supply dynamics is also not in favour in the short term. Both combined, 10Y bond is seen in bearish consolidation at 7.80-7.90% for now.
RBI is stuck between devil and the deep sea in management of Rupee exchange rate. While there is need to retain Rupee exchange rate competitive to exports and attractive to long term inflows, managing excess Rupee liquidity is emerging as serious irritant. Liquidity injection through spot USD/INR purchases is tough to be sterilised through OMO bond sales. Purchase of forward dollars cause upward pressure on short term money market rates from elevated FX premium. The only comfort for RBI is from firm DXY at 96.75-100 which would arrest Rupee gains not beyond 63.60-63.75 for push back to 64.20-64.35. The risk of Rupee weakness into 64.65-65.00 stands diluted now.
The domestic cues to watch now are growth momentum, and external cues from Brent Crude price stability at 45-60 and FED timing on start of rate hike. All taken, cues are mixed to take a firm and confident view on the immediate direction on the markets. It is prudent to stay focused on set consolidation ranges for end to end play with stop on break out either way.
Moses Harding
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