Unabated fall in Rupee, equities under pressure after the Yes Bank and IL&FS news and add to it government going back on deregulation / decontrolled pricing on Petrol and Diesel – all these factors pushed market participants to pin their hopes on RBI’s MPC (concluded last week) to increase rates. While the consensus was 25 bps hike, there were aggressive predictions of 50 bps and some were expecting mid policy hike too.Alas, RBI disappointed the market, pushing Rupee down to an all time low and stock markets into tailspin.
With Federal Reserve holding on to it’s interest rate trajectory, trade war impacting EMs negatively and crude prices hitting our CAD directly, there is a major flight of capital from India. More from the debt markets in the current FY and it’s higher than 2013 (already) when taper tantrum began. If RBI increased interest rates, it would have helped, albeit temporarily.
RBI said we are on track on the growth projection and there was slight downside revision of inflation while acknowledging the possible upside risks to inflation. They have changed their interest rate stance from Neutral to calibrated tightening. While this leaves a lot to be desired, Rupee weakness and crude prices could push up the inflation and rain on RBI’s growth parade. 10 year yields are at a sub 8 level currently, which is not way off from average September levels.
RBI is trying to ensure growth is intact – a higher interest rate will dampen both corporate borrowing and household spending especially given the festival season just around the corner. It’s a bold move in fact, on the part of RBI to hold rates. However, if we don’t boost sentiment for FPIs by arresting Rupee slide and making bonds (and India, of course) an attractive asset, RBI may not achieve it’s desired objective. We wanted a Robin Hood (boost investments even if at the cost of local businesses), but you did a James Bond, RBI. It’s disappointing, unless you are planning to bring back the original James Bond of Indian financial markets.