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The Reserve Bank of India (RBI), in its 4th bi-monthly monetary policy statement, 2015-16, on Tuesday, cut the policy repo rate by 50 basis points to 6.75%. The Rajan came up with the upbeat monetary policy numbers contemplating the current macroeconomic situation that is evolving, the highlights were:
- Reduces repo rate under the liquidity adjustment facility (LAF) by 50 bps from 7.25% to 6.75%.
- The cash reserve ratio (CRR) of scheduled banks unchanged at 4.0% of net demand and time liability (NDTL).
As a result, the Indian benchmark equity indices which were in the selling pressure yesterday until the announcement have continued consecutively for today to gain the reversing losses. Banking, Realty, Housing finance and Auto spaces are the likely gainers from this move and they have already started showing their impacts.
On the other hand, the dynamics of the Indian bond market are in play. There are now dual stimulants which are very positive for the bond markets:
- The increase in foreign portfolio investor (FPI) bond limits is something which is creating a new investor class in the bond market, for example on a rough calculation FPIs will absorb approximately 10-11 percent of the incremental net supply.
- The fiscal consolidation which the government is undertaking and which effectively means that in terms of net bond supply we will see a flat net bond supply on year-over-year terms from hereon.
However, with credit still sluggish in the economy the supply demand equation is getting conducive for the bond markets and we should continue to expect rally in the bond markets.
We believe rupee will be an outperformer. The reason is that the current emerging markets crisis has lot to do with the commodity prices and there is a differentiation that is occurring in the market between commodity exporters versus commodity importers. So India being commodity importer and the fundamentals improving, one should expect INR outperformance.
