Below Is The Views On RBI Policy by Mr. Arvind Chari, Head-Fixed Income & Alternatives, Quantum Advisors.
As widely expected, the RBI kept Repo Rates unchanged but was understandably cautious in its outlook with the pressures building on inflation from oil prices, potential MSP (Minimum Support Prices) increases and fiscal slippage. They also maintained their neutral stance which allows them to move on rates on either side.
The RBI seems to have chosen (as for now) to take a longer than normal outlook to base their monetary policy stance. The RBI expects CPI to be 5.1%-5.6% in April – September 2018 and then expects it to be in a very narrow band of 4.5%-4.6% from October 2018 – March 2019.
It seemed they are deriving comfort from that inflation projection of 4.5% for H2 Fy 19 being close to their 4% target and thus indicative that it would continue to remain on hold, until that number needs to be revised upwards. Looking that far out, they also seem to be buying time, as they said, ‘that the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management”.
The first indication, of the time RBI can remain on hold, should be available by May when the government would announce the MSP (Minimum Support Prices) for Paddy (Rice). Based on the new pricing guideline announced by the government, we believe Paddy may see an increase of more than 10% to meet with the 1.5x of cost price remuneration to farmers as outlined by the government in the recent budget.
We would also get the first estimate of the monsoons, which given the low water reservoir levels, assumes significance for food production and prices.
The RBI policy for June 2018 thus becomes a ‘Live’ one with implications on future rate trajectory against the desire and need to remain on hold for longer. Until then, the bond market trajectory would be hinged on the movement in Oil prices and Global bond yields.
Bond yields across the curve remain under-valued. With the Repo rate remaining at 6.0%, 1 year Bank CDs and 10 year bonds at 7.5% are well above the long term spread averages. Longer term government bond yields have seen an increase steadily over the months but even the short term corporate bond/ CD rates have seen a spike in the recent months. Markets clearly seem to be ‘over-pricing’ the RBI rate action and the ‘seasonal’ liquidity tightness.
Longer tenor government bond yields suffering from demand – supply imbalance though may not find any immediate support from the RBI. The RBI very clearly articulated the reasons it feels why bond yields are trading where they are and virtually sent a signal to the government to desist from making public demands from the RBI for OMOs (Open Market Operations) to manage the rising government bond yields.
The RBI doesn’t seem to be particularly happy with the continued public comments by the government officials on RBI like in two more occasions during the RBI policy press conference held yesterday on 7th Feb, 2018 they refuted the government’s claim or pointed towards the government for their failings. On the issue of extra Dividend from the RBI to the government (to meet its frail finances), the RBI was very clear that the dividend payout is a mechanical process and based on that they have already paid what was due to the government this year.
On another question on overall investment activity, although acknowledging the recent improvements, Dr. Patel mentioned the multiplicity of taxation as impediments to investments namely Corporate Income Tax, Dividend Distribution Tax, Tax on Dividend Income (above a threshold), Securities Transaction tax and now the re-introduced Capital Gains Tax on Equities.
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