In the bi-monthly Monetary Policy announcement, the RBI kept all the key interest rates and the Cash Reserve Ratio unchanged. This was in line with market and our expectations.
There have been positive macroeconomic developments since the last meeting in June. Oil and other global commodity prices have dropped significantly. The progress of the monsoon season, cropping patterns and the water reservoir levels are comfortable. RBI has reduced the inflation target for January – March 2016 by 0.2% to 5.8%. The uncertainty around developments in Greece has subsided and global bond yields are again on the way down. The Chinese stockmarket crash was an incremental negative development – we however believe that this has limited implications for India.
In spite of the incremental positives, the ‘no-change’ stance is because of the belief that the earlier rate-cuts were front-loaded and the RBI is awaiting further transmission by banks. RBI is also monitoring incremental data on inflation trends and actions by the US Fed. On the positive side, there does seem to be emerging room for more accommodation.
Fixed income market participants were expecting a revision of the Foreign Portfolio Investor limits for Government Securities from a USD limit to INR limit, which could have potentially opened up headroom for incremental flows in the short-term. The absence of this announcement was a mild negative in the short-term.
We continue to maintain that key rates will be reduced by 25 basis points before March 2016 and remain positive on the fixed income markets in India.