Markets await RBI's cues on economy in Friday credit policy review3 min read . Updated: 03 Dec 2020, 07:21 PM IST
- The RBI is widely expected to keep key interest rates maintaining its accommodative stance
Market participants are keenly looking out for cues from the Reserve bank of India ( RBI) in the next monetary policy review on Friday. Key economic indicators such as systemic liquidity, inflation targeting and central bank’s commentary on growth stance are expected to set the key themes for the equity markets which have scaled new peaks all through November .
The RBI is widely expected to keep key interest rates maintaining its accommodative stance. With the growing disconnect between wholesale and retail food inflation, governor Shaktikanta Das’ commentary on conflicting signals emerging from macro data points and inflation, outside the RBI’s tolerance zone of 4%, will be noted by markets.
The wholesale price inflation (WPI) agricultural inflation is hovering in a 2–3% range for the last few months while the CPI food inflation has ranged between 8 to 10%. Meanwhile, core inflation has been largely stable, although it should have eased given poor demand conditions.
With GDP growth on a fast normalisation path after the April-June plunge, the Monetary Policy Committee (MPC) is expected to vote unanimously to remain in a wait-and-watch mode. India’s GDP contracted at a slower pace of 7.5% in the September quarter following a sharp decline of 23.9% in previous three months.
Reflecting the incoming data, Nomura expects the RBI to revise higher both its near-term growth and inflation projections. A key focus in RBI’s meeting will be on what, if any, steps the RBI announces to bring money market rates back in line with the policy corridor, said Nomura.
“Despite the more positive macro outlook, we expect the RBI to adopt a cautious tone, flagging uncertainty on the durability of demand following the festive season and downside risks due to infection cases in developed economies and parts of India. Additionally, high inflation is a concern, but much of the inflation build-up remains due to supply-side factors. Thus, we expect the MPC to reiterate its dovish guidance from October, that it will see through the transitory inflation surge and maintain an “accommodative" stance into the next financial year," Nomura said in a note on 3 December.
As India’s growth is still slower compared to other Asian economies such as China, Japan and Singapore, RBI’s growth projection will be key for foreign institutional investors flow into equities which has kept the markets buoyant since the crash in March. With a record net inflow of $9.55 billion into Indian shares in November, FIIs are net buyers of Indian equities of over $16 billion in this year so far. Domestic institutional investors have been consistently dumping shares, selling a record ₹48319.17 crore in November.
Indian markets have recovered over 70% from March lows while valuations are stretched out. “We are at that point again when markets have rallied, headline valuations of Nifty are above long-term averages but the economy is only just coming back to normalcy," said Rahul Singh, CIO Equities, Tata Mutual Fund. He added that the pain in the unorganised sector will at some stage have an impact on consumption and economic growth, Covid has furthered the trend which started with demonetisation and then goods and services tax (GST).
Analysts, however, expect RBI to slash interest rates in FY21 as inflation cools off. “A potential pause on rates, though, is not necessarily the end of the rate-cutting cycle. We do expect inflation to ease towards 5% or below over the next few months, and this should facilitate 25–50 basis points (bps) of rate cuts. The RBI itself has hinted that there is room for further rate cuts once inflation eases," said Edelweiss Securities.
“While growth concerns and sub-optimal fiscal response may keep MPC’s stance accommodative, the inflation trajectory hints that the bar for further conventional rate cuts becomes high for the rest of FY21," said Emkay Global Financial Services expecting RBI to raise its inflation and growth forecasts in the upcoming policy. “The immediate policy focus, however, will likely be on liquidity management amid current macro, forex and money market conundrums," it said.
On Thursday, the BSE Sensex ended at 44,632.65, up14.61 points or 0.03% and the Nifty closed at 13,133.90, up 20.15 points or 0.15% as RBI’s monetary policy outcome is weighing on investor sentiment.