Pressure mounts for rate cuts - DBS Research

Indian asset markets stabilised yesterday as benchmark indices closed up 1%, lifted the rupee off lows. Sentiments also got a boost from China's two-fold policy support - rates and reserve requirements were cut simultaneously yesterday (see China and FX section for details). However, foreign investors continue to trim holdings in India's debt and equity markets, which puts this bout of stabilisation at risk. US markets ended in red yet again on Tuesday after a largely positive session.

In the wake of PBoC's move, pressure is likely to mount on the Indian central bank to follow suit. Minutes of the RBI Technical advisory committee out yesterday saw four of the seven members suggest that rates be cut back in August (with one suggesting a steep 50bp cut). Governor Raghuram Rajan however left rates unchanged, instead highlighting risks that could disrupt the on-going disinflationary phase. In recent days, Finance Minister Jaitley also called on the RBI to factor in easing inflation prints to lower rates. Separately Chief Economic Adviser opined that the period ahead will be more about deflation that inflation in India's case, which should accordingly mould policy decisions.

But we suspect that the RBI is unlikely to act in haste, just as most domestic factors favour rate cuts at this juncture. The bigger wildcard are externals, particularly worries over the Chinese economy (and its shaky financial markets), weak demand-driven fall in commodity prices and US Fed's policy direction. There are bound to be concerns that lower rates might increase the downside pressure on the respective currencies. For the time being, the shakeout in the EM currency and equity markets (including US) have pushed back Fed rate hike expectations for Sept. It remains to be seen if calmer market conditions that prevailed yesterday will extend in the near-term or lose steam. If sentiments stabilise in the run-up to next month's review and the US Fed pushes back rate hikes into next year, a window for the RBI to lower rates is likely to re-emerge.

Source : Equity Bulls

Keywords