POLICY MEASURES – STATUS QUO ON POLICY RATES
The Reserve Bank of India (RBI) left the policy rates unchanged at 7.25%, in line with market expectations. The cash reserve ratio was also unchanged at 4.00%, as expected. After today’s decision, the reverse repo rate and the marginal standing facility rates remain at 6.25% and 8.25%, respectively.
INFLATION OUTLOOK – REDUCING PRESSURE
RBI mentioned that easing commodity prices at the global level and weaker pricing power of corporate are reducing inflationary pressures. However, it stated that food inflation remains high, and the inflation outlook will be influenced by food inflation persistence. The RBI also advised caution due to the pass-through of rupee depreciation.
FISCAL DEFICIT - BETTER THAN EXPECTED
On the fiscal deficit, the RBI sounded quite positive, saying that the most recent number on the Center’s fiscal deficit has turned out better than expected and instills confidence in the government’s commitment to contain the fiscal deficit for FY14 at 4.8% of GDP.
RBI ON CURRENT ACCOUNT DEFICIT
High current account deficit has been key risk that the market has been concerned about in the recent past. However, in the policy review, the RBI did not sound as concerned as the market had generally would have expected. It mentioned that softer global commodity prices and recent measures to dampen gold imports are expected to moderate the CAD in FY14 from its level last year. It mentioned that the trade deficit has widened sharply due to a surge in festival-related/seasonal gold imports, available evidence suggests that a moderation in gold imports could be underway in June.
FORWARD GUIDANCE – LESS HAWKISH THAN FY14 ANNUAL POLICY STATEMENT
The forward guidance by the RBI is not as hawkish as the May 3, 2013 annual policy statement. The forward guidance suggests that its policy stance is still biased towards cutting rates. Contrast this with its statement on May 3, 2013 where it mentioned ‘the balance of risk yields little space for further monetary easing. According to the statement, “it is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth.” It appears from the policy statement that the RBI is in data-dependent mode. If INR stabilizes and CPI inflation moderates, then rate cuts could follow.
IMPACT ON THE BOND MARKET
While the market had more or less discounted the status quo on rates, market was also expecting a hawkish statement on rate front. However, a less than expected hawkishness and a hint of its bias towards monetary easing, has been received positively by the market. The 10 year benchmark yield which has been trading around 7.33% before the policy has rallied by around 7 bps and currently trading around 7.26%. We expect the 10 year bond yields to trade in a range of 7.20%-7.40% in the near term.
The Reserve Bank of India (RBI) left the policy rates unchanged at 7.25%, in line with market expectations. The cash reserve ratio was also unchanged at 4.00%, as expected. After today’s decision, the reverse repo rate and the marginal standing facility rates remain at 6.25% and 8.25%, respectively.
INFLATION OUTLOOK – REDUCING PRESSURE
RBI mentioned that easing commodity prices at the global level and weaker pricing power of corporate are reducing inflationary pressures. However, it stated that food inflation remains high, and the inflation outlook will be influenced by food inflation persistence. The RBI also advised caution due to the pass-through of rupee depreciation.
FISCAL DEFICIT - BETTER THAN EXPECTED
On the fiscal deficit, the RBI sounded quite positive, saying that the most recent number on the Center’s fiscal deficit has turned out better than expected and instills confidence in the government’s commitment to contain the fiscal deficit for FY14 at 4.8% of GDP.
RBI ON CURRENT ACCOUNT DEFICIT
High current account deficit has been key risk that the market has been concerned about in the recent past. However, in the policy review, the RBI did not sound as concerned as the market had generally would have expected. It mentioned that softer global commodity prices and recent measures to dampen gold imports are expected to moderate the CAD in FY14 from its level last year. It mentioned that the trade deficit has widened sharply due to a surge in festival-related/seasonal gold imports, available evidence suggests that a moderation in gold imports could be underway in June.
FORWARD GUIDANCE – LESS HAWKISH THAN FY14 ANNUAL POLICY STATEMENT
The forward guidance by the RBI is not as hawkish as the May 3, 2013 annual policy statement. The forward guidance suggests that its policy stance is still biased towards cutting rates. Contrast this with its statement on May 3, 2013 where it mentioned ‘the balance of risk yields little space for further monetary easing. According to the statement, “it is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth.” It appears from the policy statement that the RBI is in data-dependent mode. If INR stabilizes and CPI inflation moderates, then rate cuts could follow.
IMPACT ON THE BOND MARKET
While the market had more or less discounted the status quo on rates, market was also expecting a hawkish statement on rate front. However, a less than expected hawkishness and a hint of its bias towards monetary easing, has been received positively by the market. The 10 year benchmark yield which has been trading around 7.33% before the policy has rallied by around 7 bps and currently trading around 7.26%. We expect the 10 year bond yields to trade in a range of 7.20%-7.40% in the near term.
