Economy: RBI policy: cautious on external sector ::Kotak Sec, report

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RBI policy: cautious on external sector. The RBI was neutral in this policy as it stayed away from any policy rate action (except SLR cut of 50 bps to 21.5%). Given the cautious outlook on global monetary policy dynamics, the RBI focused on addressing issues related to FPI debt flows along with relaxations in the currency derivatives market. We believe that the next cut of 25 bps is more likely to be on April 7 rather than in March.

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--> Concerns on external flows and global monetary policy dynamics gain importance Having reduced the policy rate on January 15, the RBI was more focused on concerns related to global policy dynamics. The divergent monetary policy dynamics can create headwinds for India and having seen the ill-effects of sharp and sudden risk reversal, the RBI highlighted its cautious outlook. The steps to encourage more durable debt flows within existing limits were testimony to the fact that the RBI intends to safeguard the economy from any sharp debt outflows either during the Fed’s interest rate hike cycle or any other global risk-off phases. The RBI is also wary of an appreciating INR in a phase of competitive currency devaluations globally. This risks INR being overvalued (real basis), which could hurt India’s long-term competitiveness. Comfort on inflation but global spillover risks need to be monitored The RBI remains comfortable on the inflation trajectory. However, it highlighted risks from (1) monsoon uncertainty and (2) reversal of crude prices due to geopolitical events. More important, “heightened volatility in global financial markets, including through the exchange rate channel, also constitutes a significant risk to the inflation assessment”. However, the rebased GDP series and yet-to-be released rebased CPI series will also need to be evaluated to understand how the data releases stack up. The RBI maintained its January 2016 CPI estimate at 6%. For FY2015, the RBI maintained GDP growth at 5.5%, while the estimates pick up to 6.5% for FY2016. Rate cuts: when next? April 7 more likely than outside policy review cycle in March The RBI had highlighted on January 15 and also reiterated in this policy that “key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation...” While probability of the next cut is equal between March and April, we would pencil in April as the next policy move of 25 bps rate cut. We believe the RBI would want to revert to the scheduled policy-decision cycle unless the Budget significantly surprises positively by showing both consolidation as well as improving the expenditure quality. We believe adhering to both the counts will be difficult for the government, especially if it combines pragmatic assumptions on tax-revenue collections. Rate cuts: how much? 50-75 bps more in CY2015 Governor Rajan reiterated that a comfortable range for the real policy rate is 1.5-2.0%. Based on our estimate of average CPI inflation of 5.5-5.7% in FY2016, there would be room for the repo rate to go down to 7.0-7.25%, with a cut of 25 bps at each stage. 10-year India G-Sec was pricing in a policy rate cut on Tuesday and had moved to 7.65% in early trades but reverted to close at 7.73%. With the terminal repo expected as above, we think that the 10-year yield could trade down to a zone of 7.25-7.50% in FY2016. Risks to this call could emerge from reversals in crude oil prices or sudden changes in global monetary policies.


LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily04022015rq.pdf