 "A welcome shot in the arm: Ravneet Gill")
The Reserve Bank of India (RBI) made a statement of strong positive intent with a 50 basis points (bps) repo rate cut in the September policy. What is encouraging is the fact that despite this material cut, RBI has committed to maintain an accommodative stance which will help support the ongoing economic and investment recovery.
The move to ease foreign investors' access to the government bond market is also a huge positive and shall help improve the demand-supply dynamic of bonds going forward. Is there room for further monetary policy easing? Given the way RBI has defined its target real interest rate of 1.5-2 per cent for the one-year treasury bill (T-bill) rate minus the one-year forward inflation expectation, it would seem the room is limited. If one assumes average inflation shall hover around five per cent in the coming year, the central bank is close to reaching the terminal rate, given the present repo rate is 6.75 per cent and the one-year T-bill is below 7.5 per cent.
Also, given the central bank's stated "shift" to now focus on policy transmission with the government (e.g. reviewing small savings rates), further monetary accommodation this year is unlikely. Yet, with ongoing global market developments (reflected in subdued external demand and sharply correcting commodity prices) and a fledgling domestic recovery (as seen in uneven industrial production, moderate rise in consumption, and soft loans growth) clouding the outlook, RBI might well cut again next year. We think the period after the FY17 Budget would be an opportune moment to take stock of the outlook for growth, inflation, fiscal policy and structural reforms.
The move to ease foreign investors' access to the government bond market is also a huge positive and shall help improve the demand-supply dynamic of bonds going forward. Is there room for further monetary policy easing? Given the way RBI has defined its target real interest rate of 1.5-2 per cent for the one-year treasury bill (T-bill) rate minus the one-year forward inflation expectation, it would seem the room is limited. If one assumes average inflation shall hover around five per cent in the coming year, the central bank is close to reaching the terminal rate, given the present repo rate is 6.75 per cent and the one-year T-bill is below 7.5 per cent.
Also, given the central bank's stated "shift" to now focus on policy transmission with the government (e.g. reviewing small savings rates), further monetary accommodation this year is unlikely. Yet, with ongoing global market developments (reflected in subdued external demand and sharply correcting commodity prices) and a fledgling domestic recovery (as seen in uneven industrial production, moderate rise in consumption, and soft loans growth) clouding the outlook, RBI might well cut again next year. We think the period after the FY17 Budget would be an opportune moment to take stock of the outlook for growth, inflation, fiscal policy and structural reforms.
Ravneet Gill
CEO, Deutsche Bank India
CEO, Deutsche Bank India