MPC statement tomorrow

My 2-bits : the MPC statement tomorrow should err on the side of sounding more hawkish than the market expects.

If the MPC went purely by its CPI mandate, it can actually afford to be more benign than it was in February. After all, with lower vegetable prices, average CPI inflation for January - March 2018 will likely end at 4.6%, well short of the 5.1% MPC estimate. In addition, the initial forecast for monsoon is encouraging, and many analysts now project a more benign FY19 CPI path than the MPC did.

However, the MPC should look beyond this. After all, projecting India’s CPI is like throwing darts at a board. Who knows where food, oil and commodity prices will be in 6-12 months time.

What bears watching instead is financial stability, and there is ample cause to be cautious here.

First, the fiscal situation looks tough – on both expenditure and revenue fronts. In the run-up to general elections, the government will be under severe pressure to spend on farmers, rural India and perhaps oil and other subsidies. On the revenue side, GST is yet to stabilize, and we are banking on very steep increases in FY19 collections. Across all this, we risk serious fiscal slippage, which will have a cascading impact on other areas of financial stability.

Second, the external sector looks uncertain as well. Our trade deficit has been stubbornly high the last few months. With USD funding costs rising (1Y LIBOR is now at 2.67%, up 0.90% in the last year), capital flows remain soft. Net FDI has disappointed in FY18. The external macro context remains clouded by the populist bluster around trade wars and geopolitics. In the meantime, there is an overhang of open INR carry positions that have built up over the years.

On the flip side, India’s private sector investment cycle is absent, current sentiment is clouded by questions around governance and politics, and capacity utilization remains low. However, we do not have the luxury of low interest rates now. Instead, we have to guard against the possibility that any worsening of sentiment could impact external flows and financial stability even further.

When MPC issued its last statement in February, Indian bond yields were about 25-30 bps higher than they are now, and climbing.  Since the bond market was then doing MPC’s job of being a cautious watchdog, MPC could afford to benevolently talk about nurturing a nascent recovery.

With 10Y bond yields below 7.30% now and maybe heading lower, with a possible increase in FPI limits, large bond redemptions and a benign H1 issuance calendar, the MPC should tilt the other way, and sound a strong note of caution and vigilance.


If instead it adds to the bond rally with dovish commentary, and 10Y yields drop to 7.1% and below, do not be surprised if FPI and traders actually trim down positions and book profits both on bonds and currency. After all, the second half of FY19 promises a good chance of re-entry at better levels.

Comments

  1. Clara Mellor21 June 2018 at 16:44

    Planning is bringing the future into the present so that you can do something about it now. Equity Tips

    ReplyDelete
  2. Unknown20 November 2018 at 15:24

    Hey there,
    Nice blog
    check out our blogs
    how to manage Indian family monthly budget

    ReplyDelete

Post a Comment

Popular posts from this blog

Growth in Mutual Fund AUM - Reasons, Implications & Suggestions

Image
Growth in Mutual Fund AUM - Reasons, Implications & Suggestions Over the past few years, India's Mutual Funds (MFs) have seen strong growth in assets under management (AUM).  MF AUM has grown from INR 9.4T in April 2014 to INR 21.4T in October 2017, at a compounded annual growth rate (CAGR) of 26%. In contrast, during the period April 2010 to April 2014, MF AUM growth was a sedate 5% CAGR.   Within this, equity MF AUM has grown fourfold from INR 1.9T in April 2014 to over INR 8T now. As a result, the proportion of equity in MF AUM has grown from 21% in April 2014 to 38% now. Possible reasons for this growth What explains this rapid growth in MF AUM, and particularly equity MF AUM?  One likely reason is that term deposit rates have moved down substantially since 2014, in tandem with the RBI easing cycle. In addition, interest income from bank fixed deposits is taxable with no inflation indexation benefit, while Mutual Fund investments stil...
Read more

The 2013 RBI FCNR(B) Swap Window – Review & Takeaways

In the wake of recent volatility in our currency markets, commentators have – somewhat prematurely - started to recall the extraordinary steps taken by RBI in 2013.  To recap, post the Bernanke taper tantrum of mid-2013, besides other steps, the RBI announced two special swap windows in September 2013. First, it offered to swap US$ raised by banks from foreign currency non-resident (FCNR) deposits of maturity 3-year and above into INR, at a concessional rate of 3.5% p.a. This was about 3.0% cheaper than the average market during the period.  Second, it allowed banks to borrow additional FCY funds from overseas and swap them into INR at a concessional rate of 1% below market.  Collectively, the two swap windows brought in $34B at a crucial time for India. The first swap against FCNR(B) deposits, in particular, exceeded all expectations and raised $26B of 3-year and above money – much more than the previous schemes of India Mi...
Read more

Everyday Terms in Macroeconomics – And Their Surprising Implications

Everyday Terms in Macroeconomics – And Their Surprising Implications   Macroeconomics is replete with regular-sounding terms such as consumption, savings and investments. However, if we were to interpret them from our everyday household experiences, we could be left with an erroneous understanding of the dynamics of the economy.   For instance, all else being equal, when a salaried household reduces consumption, it increases its savings without impacting its income. From an overall economy perspective, however, if we all reduced consumption of domestic goods and services, we would only reduce our total domestic income, with no impact on the stock of total savings.   Likewise, our household experience might tell us that savings are a pre-requisite to fund investments. From an overall economy perspective, however, households would struggle to increase the stock of collective savings by themselves. Instead, policymakers might be better advised to focus on investments and exp...
Read more