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Posts Tagged ‘#RBIPolicy’

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The shift in RBI’s stance came, but not in the repo rate as most people were expecting today.The Monetary Policy Committee ( MPC) decided to change the stance from neutral to “calibrated tightening” of monetary policy, which in plain English means that rate cuts are probably off the table, and RBI can decide on when to raise or not raise rates depending on how fresh data comes in.

Whilst a 0.25% hike in the repo rate was the consensus view of the expected MPC action today, with some even expecting a 0.5% hike, the policy statement surprised markets – bonds positively, equities and the rupee negatively, with RBI choosing to do nothing, as MPC members voted 5:1 in favor of an unchanged repo rate at 6.50%. This was also probably driven by the fact that there have been two consecutive rate hikes in the last two MPC meetings.

They stuck with their primary mandate i.e. controlling inflation, with the objective to achieve medium term target for CPI inflation of 4 percent within the range of +/- 2%, while supporting growth.

Since the last MPC meet in August 2018, the Indian basket of crude oil has increased sharply by US$ 13 a barrel, whilst global economic activity has been able to withstand ongoing trade tensions thus far. Food inflation has remained unusually weak, which imparts a downward bias to its trajectory in the second half of the year. The risk to the food inflation from a 9% deficit in the monsoon, is also probably mitigated by higher production of major kharif crops for 2018-19 than last year’s record. An estimate of the impact of an increase in minimum support prices (MSPs) announced in July has been factored in the baseline projections.

The projected inflation in Q2:2018-19 is at 4%, 3.9%-4.5% in the second half and 4.8% in Q1:2019-20 with risks on the upside, which were lower than earlier estimates.

With risks broadly balanced GDP growth projection for 2018-2019 was lowered at 7.4% against 7.5 % in August due to strong base effect.Private consumption has remained strong and is likely to be sustained even as the recent rise in oil prices may have a bearing on disposable incomes. However, both global and domestic financial conditions have tightened, which may dampen investment activity. Rising crude oil prices and other input costs may also drag down investment activity by denting profit margins of corporates. This adverse impact will be alleviated to the extent corporates are able to pass on increases in their input costs. Uncertainty surrounds the outlook for exports. The recent rupee depreciating could be negated by slowing down of global trade and the escalating tariff wars.

Global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions therefore pose substantial risks to the growth and inflation outlook.

Your Investments

As we see change in stance from neutral to calibrating tightening signals that rate cuts are off the table. Concerns seem to be around crude oil prices, global interest rates and the ongoing global developments on the trade front. Equities continue to trade at a premium and whilst it may be very tempting to buy lumpsums as equities have fallen substantially, equity valuations in India continue to be elevated vis a vis long term averages. A gradual entry strategy or a continued SIP/STP strategy is most suited to the current market scenario. It may be a good idea to add fixed income exposure through a combination of largely ultra short term, short and medium term strategies focused on high credit quality portfolios, to avoid any spillover of the continuing bad loan cycle on your investments.

Your Loans

After hiking the repo rate twice in a row, the Reserve Bank of India (RBI) has kept the key policy rates unchanged. However, the central bank has changed its stance on the key policy rates to ‘calibrated tightening’. This indicates that RBI is of the view that there is upward pressure on interest rates which means your EMIs are likely to continue ti go up. Expect banks to raise rates gradually even though RBI kept rates constant today.

Way forward

The next policy is due on December 5, but don’t be surprised for mid course corrections if the data so warrants. Ultimately that’s what caliberated tightening probably alludes to.

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Today marked the 3rd Bi-Monthly policy statement by the RBI for the FY 2018-19 with members voting 5-1 in favor of a rate hike.

This was largely in line with market expectations and was already priced in, as post the release of the minutes of the monetary policy bond yields did not move much in either direction.

However, the MPC also continued to maintain a neutral stance, indicating that it is trying to play a delicate balance between inflation and growth, and decisions are being taken with the objective of achieving the medium term target for CPI at 4% within the range of +/- 2% and future data prints

The MPC mentioned that domestically various indicators suggest that economic activity has continued to be strong. Significant turn around in the production of capital goods and consumer durables, Progressive monsoon and increase in MSPs of Kharif crops are expected to boost rural demand by rising farmer’s income. Vehicle sales augur well for urban income growth.

Retail inflation i.e. CPI grew to 5% in June from 4.9% in May, driven by an uptick in inflation in fuel. Food inflation remained muted due to lower than usual seasonal uptick in prices of fruits and vegetables in summer months. Adjusting for the estimated impact of the 7th central pay commission’s house rent allowances (HRA), headline inflation increased from 4.5 per cent in May to 4.6 per cent in June. Low inflation continued in cereals, meat, milk, oil, spices and non-alcoholic beverages, and pulses and sugar prices remained in deflation. Factors mentioned above have resulted marginally downward revision in inflation projections for Q2 vis-à-vis the June statement. However, projections for Q3 onwards remain broadly unchanged on account of uptick of 20 bps in inflation expectation for 3 months and 1 year ahead horizon survey of households by RBI’s. RBI’s industrial outlook survey also reported higher input costs and selling prices in Quarter 1 of 2018-19. Input cost of companies polled in services PMI in June also stayed elevated. Farm and non farm input costs rose significantly in June.

The central government has decided to fix the minimum support prices (MSPs) of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19. This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and possible secondary impacts on headline inflation. Uncertainty around the full impact of MSP on inflation will only resolve in the next several months once the price support schemes are implemented and procurement by the government is visible.

Based on an assessment of the above-mentioned factors, inflation is projected at 4.6 per cent in Q2, 4.8 per cent in H2 of 2018-19 and 5.0 per cent in Q1:2019-20, with risks evenly balanced. Excluding the HRA impact, CPI inflation is projected at 4.4 per cent in Q2, 4.7-4.8 per cent in H2 and 5.0 per cent in Q1:2019-20.

The MPC notes that domestic economic activity has continued to sustain momentum and the output gap has virtually closed. However, uncertainty around domestic inflation needs to be carefully monitored in the coming months. In addition, recent global developments raise some concerns. Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth. On account of these risks, RBI governor stated that by keeping the neutral stance, the Monetary Policy Committee have kept the option of further rate increase or decrease open and dependent on future data.

With an election year upon us and possible fiscal risks emanating, along with global outflows on the back of higher US interest rates and a falling rupee, this may not be the last of the rate hikes in our view.

Your Investments

Financial markets have continued to be volatile and driven mainly by monetary policy stances in advanced and emerging economies and geopolitical tensions. Globally, equity markets have been volatile on trade tensions and uncertainty around Brexit negotiations. However, it also important that public finances do not crowd out private sector investment activity at this crucial juncture.

Capital flows to Emerging Economies declined in anticipation of monetary policy tightening in Advanced Economies. Also currency of Emerging economies have depreciated against the US dollar over the last month on account of strong USD supported by strong economic data.

Equities continue to remain overpriced from a price to earnings perspective in spite of recent corrections and a better growth outlook. However, good results so far by many companies, along with good growth expectations and better capacity utilisation bode well for earnings growth going forward.

Real rates continue to remain positive.The rising G-sec yield makes dynamic bonds and long term bond funds unattractive and the exposure to the same should be minimized. Bonds with a shorter duration of 3 months to 2 years are ideal in the given scenario. We therefore, continue to believe that investors should continue to have fixed income exposure through a combination of lower duration and short term strategies.

Your Loans

With an increase of 25 basis points by the RBI, the deposit rate of the banks could further increase which would be followed by lending rate hikes. Thus we suggest looking at prepaying or raising EMI amounts on your loans to negate the interest rate hike and future hikes that could follow.

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Today marked the second and much awaited Bi-Monthly policy statement by the RBI for the new FY 2018-19.

In line with what bond markets expected, the Monetary Policy Committee (MPC) delivered a 6-0 verdict on an interest rate hike by 0.25%. The was largely in line with market expectations post the release of the minutes of the last meeting and thus the bond market had only a marginal impact of this change.

However, the MPC also continued to maintain a neutral stance, indicating that it is trying to play a delicate balance between inflation and growth, and decisions are being taken basis news flow and fresh data coming in.

The MPC noted that domestic economic activity has exhibited a sustained revival in recent quarters and the output gap has almost closed. Investment activity, in particular, is recovering well and could receive a further boost from swift resolution of distressed sectors of the economy under the Insolvency and Bankruptcy Code. This is in general good news for the economy.

Retail inflation i.e. CPI grew to 4.6% in April. The decision to raise rates is therefore in line with the objective of keeping the medium term inflation at 4% i.e. well within the 2-6% range.

Since the MPC’s meeting in early April, the price of Indian basket of crude surged from US$ 66 a barrel to US$ 74. This, along with an increase in other global commodity prices and recent global financial market developments, has resulted in a firming up of input cost pressure thus persisting in a high CPI inflation projection for 2018-19. On the other hand the summer momentum in vegetable prices was weaker than the usual pattern softening the food inflation in the short term, though this has been more than negated by the changes in oil prices. Household inflation expectations have also moved up sharply and  pricing power seems to be on its way up as well.

Taking these effects into account, the projected CPI inflation for 2018-19 is revised to 4.8-4.9 per cent in H1 and 4.7 per cent in H2, including the HRA impact. Excluding the impact of HRA revisions, CPI inflation is projected at 4.6 per cent in H1 and 4.7 per cent in H2.

Crude oil prices have been volatile recently and since consumption, both rural and urban, remains healthy and is expected to strengthen further, all this imparts considerable uncertainty to the inflation outlook, possibly on the upside. With an election year upon us and possible fiscal risks emanating, along with global outflows on the back of higher US interest rates and a falling rupee, this may not be the last of the rate hikes in our view.

Your Investments

Geo-political risks, global financial market volatility and the threat of trade protectionism pose headwinds to the domestic recovery. However, it also important that public finances do not crowd out private sector investment activity at this crucial juncture.

In most Emerging Market Economies (EMEs), bond yields have risen on reduced foreign appetite for their debt due to growing dollar shortage in the global market and on prospects of higher interest rates in Advanced Economies.

Equities continue to remain overpriced from a price to earnings perspective in spite of recent corrections and a better growth outlook. However, signs of improved demand and pricing power for companies, along with good growth expectations and better capacity utilisation,  bode well for earnings growth going forward. Corrections into equities could therefore be bought into.

Real rates continue to remain positive.The rising G-sec yield makes dynamic bonds and long term bond funds unattractive and the exposure to the same should be minimized. Bonds with a shorter duration of 3 months to 2 years are ideal in the given scenario. We therefore, continue to believe that investors should continue to have fixed income exposure through a combination of lower duration and short term strategies.

Your Loans

Even before the RBI meet, the banks had begun hiking both their lending and borrowing rates. This rise in lending rates was brought about by the rapid increase in bond yields and increased loan demand, especially in private banks.

With an increase of 25 basis points by the RBI, the deposit rate of the banks could further increase which would be followed by lending rate hikes. Thus look at prepaying your loans with excess liquidity.

A 6-0 verdict is therefore a clear indicator that inflation targeting continues to be the MPCs primary role, and a conservative stance will probably give foreign investors a more positive view on India.

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RBI has been proven right on its past decisions on interest rates, and in line with consensus views post the Budget, the Monetary Policy Committee (MPC) decided to keep the repo rate and reverse repo rate unchanged at 6 percent and 5.75 percent,respectively. The MPC also decided to keep the policy stance as neutral, and indicated that further rate hikes or rate cuts will depend on incoming data. It does seem like a long pause on interest rates is in store. The MPC voted 5-1 in favour of status quo, with one member expressing a preference for a rate hike.

Since these were in line with market expectations, both bond and equity markets had already priced in this scenario, and thus they did not react much to this announcement.

The CPI projections for inflation going forward were higher than projected in the last policy, with inflation expected to continue to be elevated at 5.1%p.a in Q4, and 5.1% -5.6% p.a, in H1 2018, due to pressure from higher commodity prices, oil and possible impacts of MSP hikes and increased customs duties, along with greater pricing power for companies to pass on these costs to end consumers.

Growth for 2017-18 is projected at 6.6% ( lower than 6.7% expected earlier) , and projected for 2018-19  at 7.2 %  overall. This recovery is expected on the back of better bank credit growth, an increase in capacity utilisation, GST stabilisation and bank recapitalisation.

Governor Patel ascribed the recent sharp rise in bond yields to various global and domestic factors; including higher US rates, oil prices, increase in inflation, cyclical pick- up in demand in the economy as well as fiscal slippages from the government.

 

Your Investments

With the RBI referring to a recovery in the economy, it does seem that whilst they will continue to track data closely, strategies that are focused on interest rates staying elevated should be the preferred choice.  Considering that real rates of return (returns from fixed return investments less inflation) continue to be significantly positive, we continue to believe that investing in fixed income is attractive, as equities continue to trade at significant premiums to long term price to earnings ratios in spite of the recent correction.  It may be a good idea to continue to have fixed income exposure through a combination of largely accrual, short to medium term, and hold to maturity strategies. Considering the bank recapitalisation, investors could also consider credit opportunities funds for a small portion of their portfolios. For investors willing to continue to look at interest rates having periods of downward volatility, dynamic bond funds that have the flexibility to move across bond maturities, can be explored for 10% – 15% of the fixed income portfolio.

 

Your Loans

Whilst RBI’s decision to hold rate cuts could indicate status quo on rates, we think that the rapid increase in bond yields and its negative impact on bank balance sheets could create upward pressure on loan rates, with banks possibly raising rates going forward.

Reserve Bank introduced the Marginal Cost of Funds based Lending Rates (MCLR) system with effect from April 1, 2016. With the introduction of the MCLR system, it was expected that the existing Base Rate loans shall also migrate to MCLR system. It is observed, however, that a large proportion of bank loans continue to be linked to the Base Rate. Since MCLR has proven to be a better tool to transmit interest rates, RBI has decided to harmonize the methodology of determining benchmark rates by linking the Base Rate to the MCLR with effect from April 1, 2018. This is likely to help borrowers who are still on base rate linked loans.  An ombudsman scheme to improve customer grievance handling for loans taken from NBFCs has also been introduced.

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