| India Strategy Surprise Rate Hike ... Balanced with Dovish Guidance | ||
· In the Quarterly Monetary Policy Review announced earlier today, the RBI surprised financial markets by increasing the Repo Rate by 25 bps (vs consensus expectations of no change).
· The future guidance, however, sought to comfort markets. The Central Bank opined that “if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture”.
· Consequently:
o The Repo rate stands increased by 25 bps from 7.75% to 8.00%.
o The Marginal standing facility rate stands increased by 25 bps to 9.00%.
o The CRR remains unchanged at 4.0%.
· Key statements from the Policy that merit attention:
o Explaining the rationale for the rate hike ‘An increase in the policy rate will not only be consistent with the guidance given in the Mid-Quarter Review but also will set the economy securely on the recommended disinflationary path.’
o On future guidance ‘The extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture.’
o On medium-term inflation targets ‘Urjit Patel Committee has indicated a “glide path” for disinflation that sets an objective of below 8 per cent CPI inflation by January 2015 and below 6 per cent CPI inflation by January 2016’.
o On the RBI’s growth forecast ‘If policy actions succeed in delivering the desired inflation outcome, real GDP growth can be expected to firm up from a little below 5 per cent in 2013-14 to a range of 5-6 per cent in 2014-15, with risks balanced around the central estimate of 5.5 per cent’.
· Market reaction. Financial markets are disappointed (though not spooked) with the policy announcement today.
o 10-year treasury yields remain largely unchanged at 8.76% (they have been risen by nearly 20 bps since the release of the Urjit Patel Committee recommendations).
o The Benchmark equity index – NIFTY – has lost a marginal 0.3%; Bank Nifty is down about 1%.
o The INR though has appreciated a marginal 0.3%.
· Outlook and portfolio stance. We have been arguing for Indian Equities to stay range-bound over the near term given an absence of meaningful upside catalysts. Valuations are middling, Growth continues to weaken with limited stimuli available and the Political situation is fluid (most recently in India Strategy: 1H 2014 – Walking the Tight Rope, January 27). We maintain that stance. If anything the RBI’s policy stance reinforces it. Our portfolio stance in biased towards global sectors. We remain underweight most local cyclicals including financials.
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