Fiscal prudence by the incumbent regime, moderating inflation and hopes of a better monsoon has paved the path for overall decline in interest rates. The consensus now calls for a cut in the repo rate by 25 basis points, while experts also do not rule out an aggressive move of 50bps cut. We infer that Raghuram Rajan may not shy away from the delivering an aggressive rate cut, given that the central bank has done the same in the past as well. Some may argue that the prevalent situation may not demand a 50bps move, but RBI can justify the rationale that such aggressive cuts can be frontloaded in order to stimulate the economy and will accordingly monitor the ensuing inflationary and growth numbers before taking a call on the future course of the interest rate trajectory.
After keeping the interest rates unchanged during the last two monetary policy reviews, RBI is now expected to initiate a move during April. At the onset of this calendar year, the central bank had set the onus on the incumbent regime, wherein the government was expected to strike a balance between growth and fiscal prudence, which can provide the much needed leeway to act on the rates. Effectively, optimism emanated from the Union Budget for Fiscal Year 2016-17. The budget was based on various aspects, including agriculture, rural population, social welfare, infrastructure, financial reforms, tax reforms and ease of doing business. The budget also featured huge capital expenditure on roads and railways. Most importantly, the incumbent regime stuck to the fiscal roadmap. In this respect, the Finance Minister announced that the fiscal deficit target of 3.9% for this year is met and target of 3.5% has been maintained for the next fiscal year. Fine balancing act between fiscal prudence and growth can now persuade the central bank to lower the interest rates.
On macroeconomic side, India's consumer inflation during February eased to 5.18%, when compared with the reading of 5.69% in January. The inflation rates for rural and urban areas for February were reported at 5.97% and 4.3% respectively, as compared to 6.48% and 4.81% during the prior month. Meanwhile, India’s current account deficit during October-December period (Q3 FY16) narrowed to 1.3%, when compared with the reading of 1.5% during the same period last financial year. On the negative side, India's industrial output during January contracted 1.5% on yoy basis. On broader front, Indian economy grew 7.3% during the third quarter of the current fiscal year, slower than the upwardly revised reading of 7.7% during the prior quarter. However, Indian government is projecting growth for FY2015-16 at 7.6%, better than the growth rate of 7.2% during the previous fiscal year.
In the credit markets, Indian sovereign bond prices persisted with the strength during the course of March, as a rate cut in the repo rate by the RBI seems to be likely. Expectations are high that RBI will initiate further measures to boost liquidity, including persistent open market operations. The recent action in the bond markets justifies the same, with yields on the sovereign 10 year bond dropping by more than 40 basis points after the announcement of the Union Budget.
Market participants will also derive courage from the overseas developments, wherein US Federal Reserve has realigned its stance on interest rate trajectory, now projecting only two hikes in 2016, significantly lower than the projection of 4 moves in December. Fed now sees the benchmark fed funds rate rising to 0.9% by the end of 2016, when compared with the earlier estimate of 1.4%. In the latest, Janet Yellen has expressed caution on the interest rate trajectory and did not provide any timeline for the rate hikes. She stated that although risks to the US economy appear limited, this assessment is subject to considerable uncertainty. Economic and financial conditions across the globe remain less favorable than they did in December, when Fed initiated the first rate hike.
On macroeconomic side, India's consumer inflation during February eased to 5.18%, when compared with the reading of 5.69% in January. The inflation rates for rural and urban areas for February were reported at 5.97% and 4.3% respectively, as compared to 6.48% and 4.81% during the prior month. Meanwhile, India’s current account deficit during October-December period (Q3 FY16) narrowed to 1.3%, when compared with the reading of 1.5% during the same period last financial year. On the negative side, India's industrial output during January contracted 1.5% on yoy basis. On broader front, Indian economy grew 7.3% during the third quarter of the current fiscal year, slower than the upwardly revised reading of 7.7% during the prior quarter. However, Indian government is projecting growth for FY2015-16 at 7.6%, better than the growth rate of 7.2% during the previous fiscal year.
In the credit markets, Indian sovereign bond prices persisted with the strength during the course of March, as a rate cut in the repo rate by the RBI seems to be likely. Expectations are high that RBI will initiate further measures to boost liquidity, including persistent open market operations. The recent action in the bond markets justifies the same, with yields on the sovereign 10 year bond dropping by more than 40 basis points after the announcement of the Union Budget.
Market participants will also derive courage from the overseas developments, wherein US Federal Reserve has realigned its stance on interest rate trajectory, now projecting only two hikes in 2016, significantly lower than the projection of 4 moves in December. Fed now sees the benchmark fed funds rate rising to 0.9% by the end of 2016, when compared with the earlier estimate of 1.4%. In the latest, Janet Yellen has expressed caution on the interest rate trajectory and did not provide any timeline for the rate hikes. She stated that although risks to the US economy appear limited, this assessment is subject to considerable uncertainty. Economic and financial conditions across the globe remain less favorable than they did in December, when Fed initiated the first rate hike.
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