Monetary Policy view - Aneesh Srivastava, CIO - IDBI Federal Life Insurance

Change is imminent…

Strong rate-tightening steps taken by the RBI in the last few quarters have badly impacted the investment & consumption cycle. Deteriorating global macro-economic environment also does not auger well for India's economic growth. All this is reflected in the poor GDP & IIP growth numbers of past months & quarters. Recent correction in the global commodity prices would have been good news for commodity importers like India but at the same time sharp 20% depreciation of rupee has prevented any meaningful benefit for India so far.

Despite the fact the food inflation has come down substantially from its high of 9.01% to 4.35% for week ended December 3, WPI inflation remains sticky above 9%. In this environment, tone of RBI is turning dovish. We expect that rate tightening cycle is over however it would take at least one more quarter for RBI to start any easing cycle, unless there is further sharp deterioration in global macroeconomic environment. We also expect that RBI would continue to use OMOs to infuse liquidity in the system.

Interest rates in economy are sensitive to RBI policy as well as government borrowing programme. We expect fiscal deficit to be around 5.6-5.8% of GDP and hence we do not expect a secular decline in yields from here on.

Source : Equity Bulls

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