On-hold US Fed paves way for RBI rate cuts: DBS Group Research

The US Federal Reserve extended its on-hold stance in its overnight policy review (see US/ FX/ Rates for details). Post-FOMC, stable markets are not a given as focus might swing from a healing US economy back to global growth concerns.

Nonetheless, receding external (event) risks pave the way for the Reserve Bank of India (RBI) to cut the Repo rate by 25bps later this month. Based on domestic developments, there is a sufficient case for rates to be lowered. CPI inflation held below 4% in Jul and Aug on broad disinflation in addition to base effects. Back in August, the central bank had emphasised that it will look through distorted inflation readings in these two months, but the slower-than-expected sequential pace likely came as a surprise. Our estimates also show that the impact of below-normal monsoon lasts for 3-4 months, suggesting that even when base effects fade, inflation will stay within 5.0-5.5% by December. On Thursday, RBI Deputy Governor Urjit Patel said sustained low inflation in the medium to long term and fiscal restraint were key pre-requisites to lower the cost of funding. Whilst these remarks were interpreted as being hawkish, we see this as an attempt to temper expectations of aggressive rate cuts.

Base effects are likely to keep inflation firm in FY17, alongside risks of an upturn in commodity prices. Aggregate demand conditions are also expected to improve in the coming quarters, along with a cyclical upturn in industrial activity driven by higher government spending led boost to infrastructure investments, lower financing costs and easing inflation. Structural tailwinds to India's recovery by way

Global/Fed: It's a new world: China now factors explicitly into US Federal Reserve interest rate decisions

SG: Poor export performance in August pushes economy closer to a technical recession

IN: On-hold US Fed paves way for RBI rate cuts

PH: Current account to remain in surplus

Currencies: By doing nothing, Fed added uncertainties

Fixed Income: USTs regains ground lost earlier this week as the Fed holds rates

Source : Equity Bulls

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