India Report - DBS Group Research

Indian asset markets joined the global rout yesterday, with benchmark equity index plunging 5.9% and rupee depreciating more than 1% on the day to close below 66.60. Worries over the health of the Chinese economy, collapse in global oil prices on weak demand concerns and sharp losses in the US markets have weighed on the Asian markets. After a choppy session, US markets closed down 3.6% on Monday, priming the region for another bearish start.

Indian authorities attempted to soothe nerves, with Prime Minister Modi stress­ing that unfavourable external events have triggered this correction, while the economy's fundamentals were stable. Separately, RBI Governor Raghuram Rajan reiterated that the foreign reserves buffer was sufficient to contain volatility and that the economy was in a much better shape than in the past. Indian rupee's strong gains against its trading partners also received a mention, which we be­lieve is the reason why the authorities will be more tolerant of the recent rupee adjustment.

Against this backdrop, next month's policy decision will be a tough call. Odds of a rate cut in Sept have risen after the below-consensus Jul CPI inflation. Since RBI's August review, most of the domestic pre-conditions to lower rates have been fulfilled. Impact of below normal rains in Aug yet far has been largely contained, which along with base effects will keep Aug CPI below 4%. Renewed slowdown in crude prices will suppress tradables inflation, while underlying growth momentum and subdued corporate performance make a clear case for rates to be cut further.

While domestic factors fall into place, the RBI will be mindful of the external environment:

a) fallout of China's move to devalue the yuan;

b) clarity on the US Fed rate direction.

If recent depreciation pressure on the rupee persists, we suspect that the central bank will be wary of lowering rates further. However if the markets settle in the run-up to next month's review and the US Fed pushes back rate hikes into next year, the RBI will have the legroom to lower benchmark rates. A close call.

Source : Equity Bulls

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