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Market Commentary
DBS expects the central bank to lower the Repo rate by 25bps to 7.0%, with the fixed corridor to take the reverse repo to 6%
Posted On : 2015-09-28 11:08:42( TIMEZONE : IST )
All eyes on RBI policy review, fiscal
The Reserve Bank of India will review benchmark rates on 29 Sep (Tuesday). We look for the central bank to lower the Repo rate by 25bps to 7.0%, with the fixed corridor to take the reverse repo to 6%. This will mark the fourth rate cut this year, after a cumulative 75bp between Jan-Jun15.
Earlier, the policy outlook for second half of the calendar year was clouded by the US Federal Reserve's rate direction, Chinese yuan-led volatility and fallout of a weak monsoon. Receding risks on these counts and sufficient domestic cataÂlysts are likely to prod the central bank to lower rates this week (DBS Group Research; India: RBI - another window opens; 22Sep15).
Commodity prices (INR terms) have eased further, with the CRB index (Thomson Reuters/ Core commodity index) down 1.5% since August. Inflationary expectaÂtions are also expected to ease in September, mirroring the global commodities' down move. From a high of 7% YoY a year ago, CPI inflation fell to 3.7% in July and August.
At August's review, the RBI had emphasised that it would look through base-effect-distorted inflation readings in these two months but the slower-than-expected sequential pace probably took it by surprise. Moreover, our estimates suggest that the impact of below-normal monsoon lasts for 3-4 months, imÂplying that inflation will likely stay within 5.0-5.5% through December. Better policy transmission should also help. To improve the sensitivity of retail rates to policy changes, the RBI proposed a regulatory change whereby banks would need to consider marginal cost of funds to calculate lending rates.
Apart from the policy meeting, Aug fiscal deficit numbers will be released on 30 Sep (Wednesday). Despite strong indirect tax collections, the Apr-Jul fiscal deficit has already accounted for 70% of the full-year target. A third of the budgeted expenditure has been disbursed, with more to be front-loaded to boost public sector capex and infrastructure spending. With direct tax revenues slow to catch-up, we expect the fiscal position to remain under pressure over the next couple of months. Given the government's emphasis on fiscal consolidation, risks of overshoot of targets will be mitigated by expenditure cuts to stay within the -3.9% of GDP red line.
