INSUBCONTINENT EXCLUSIVE:
By Lakshmi IyerRBI has hiked the repo rate by 25 bps to 6.50 per cent while keeping a neutral stance
The policy was on expected lines, however the inflation outlook seems to have inched up a bit.
CPI inflation is now projected at 4.6 per
minimum support prices for crops has brought in some upward pressure on the inflation front
At that, the weakening monsoon is a fresh cause of concern from a market standpoint over the medium to long term.
Moreover, geopolitical
stresses continue to support the crude oil prices above the $70 a barrel
In last one year, Brent crude has rallied from $50 a barrel to $80 a barrel (at its peak point)
Brent price rise has a major economic impact for net crude importer countries like India: the current account deficit begins to rise, the
rupee begins to lose value and input costs of most commodities-dependent companies spiral up
Thus, a crude price rally is generally a harbinger of inflationary pressure for the Indian economy.
Further, with the weakening of the rupee
against the dollar shows tangible concerns with respect to the fallout of the global trade war
As the uncertainty on this front rises, the rush for safe haven assets may increase
A hike in the repo rate has provided interim support to the rupee given a substantial ~7 per cent depreciation (YTD 2018)
Also, strong economic growth forecast at 7.5 per cent for 2018-19 may cause the cost of production to be transferred to consumers
supplementing further rise in inflation.
In order to curb this anticipated inflationary pressure, a hike in the repo rate may have been
The current hike by RBI has given assurance that Indian economy is ahead of the curve
We expect investment activity and growth momentum to sustain at their current levels.
Going forward, there is a general expectation about
the possibility of easing in oil prices as tensions de-escalate and supply increases kick in
This may weaken the inflation cycle and help improve the RBI stance over time
However, there is no trend to suggest this, hence our watch on crude oil prices continues.
The vulnerability is such that every $10 a barrel
rise in crude oil prices impacts CPI (retail inflation) by 30-40 bps !
Yet, we believe the policy rate hikes may have peaked based on the
present data and the current policy statements, warranting a pause for now
FY19, which would typically be the busy season for credit growth
This should offer some solace to liquidity conditions, and thus support the short end of the yield curve.
It could also augur well for long
bond yields as a cushion is created.
For investment options available in the fixed income space, categories like low duration and credit
risk funds offer the much needed stability to ride such market volatilities
We continue to remain big fans of carry yields in India over potential capital gains even at this juncture and would urge investors to stay
invested in fixed income funds
