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View: Twist in the tale, markets turn pale

Going forward, the MPC is likely to see two CPI prints before the Feb policy.

ET CONTRIBUTORS|
Dec 06, 2019, 09.03 AM IST
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PTI
BSE-13---PTI
It was natural for bond yields to spike by 10-15 bps across the curve as a rate cut was almost priced into bond yields.
By Lakshmi Iyer
CIO-Debt & Head-Products, Kotak AMC

Picture this scene from the movie Kahaani – where the female protagonist (Vidya Bagchi) was shown as carrying a child, and the climax revealed that she actually wasn’t pregnant!

Well, something similar happened as a classic ‘Kahaani mein Twist’ factor where the Monetary Policy Committee (MPC) voted to keep the status quo on the policy repo rate at 5.15 per cent even while maintaining the accommodative stance. This was in contrast to the market and our expectations of a 15-25 bps cut in rates. It was natural for bond yields to spike by 10-15 bps across the curve as a rate cut was almost priced into bond yields. The 10-year benchmark government bond yield closed at ~6.61 per cent (up from 6.45 per cent levels pre-policy). It seems like the party pooper actually was the recent uptick in headline CPI, which led RBI to revise the CPI estimates higher. CPI inflation was projected at 3.4 per cent for Q2:2019-20, 3.5-3.7 per cent for H2:2019-20 and 3.6 per cent for Q1:2020-21 with risks evenly balanced.

Alongside this, real GDP growth for 2019-20 was also revised downwards from 6.1 per cent to 5.0 per cent — 4.9-5.5 per cent in H2 and 5.9-6.3 per cent for H1:2020-21. It also seems quite apparent now that RBI would want to see some transmission of policy rates before rushing to press the accelerator on rates yet again. The 1-year median marginal cost of funds-based lending rate (MCLR) has declined by 49 basis points.

Going forward, the MPC is likely to see two CPI prints before the Feb policy, which may still be elevated. Hence, the wait-and-watch stance may continue possibly into February 2020 as well. By early FY2021, we could see some reversal in food prices and the path to rate easing could then resume.

Since the GDP growth is likely to remain subdued over this period, all attention would be on the inflation numbers to decide the policy rate trajectory. The key risk factor continues to be a potential overshoot on the fiscal side, which could temper some sentiments of the MPC members as well. In the tug of war between carry v/s potential capital gains, the likelihood of earning carry could gain momentum for now. Preference for shortto mid-end of the curve (1-5 year), which has reasonable anchor due to comfortable banking system liquidity, continues. INR has displayed some resilience and is likely to remain stable in the near future. Comfortable forex reserves to come to the rescue of INR should there be a rout on EM currencies. Credits can be looked at selectively, more from bottom-up stock picking, than a top-down sector view. In conclusion, we do not view this as a reversal of trend in rate actions but more a breather to absorb more data points. Kahaani 2 abhi baaki hai!
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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