Not much is expected from the RBI’s policy meeting on Tuesday, with the general expectation being that governor Raghuram Rajan will be in a wait-and-watch mode. The governor is expected to wait to see the progress and impact of monsoon as also hints from news in the US. Federal Reserve Chairperson Janet Yellen is expected to speak after the recently announced gloomy job data in the US. Rajan keeps a close tab on the interest rates development in the US, as it can have an impact on funds flows in India.
There is, however, more interest on Rajan’s tenure than on interest rates. But nothing much will be expected in the interaction between Rajan and media as he most likely will duck the controversial question.
So will the policy be a non-event?
Though not much is expected on the interest rate front, there are other areas which will be keenly tracked by analysts and economists. We look at five such points that can give both equities and bond markets a hint to the governor’s line of thinking and the state of the economy.
1. Growth data: Markets would be interested in Rajan’s take on the recently published GDP data. There has been criticism in certain circles about the quantum of "discrepancies" in the fourth quarter GDP number which resulted in the growth print of 7.9%. Rajan had in his earlier speeches made it clear that even he fails to understand the revised GDP numbers. His take on the current set of numbers will be eagerly watched.
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2. Inflation expectation: Commodity markets have been moving up. Crude oil, one of the main reasons for lower inflation in India as well as globally, has risen by 85% since its bottom in mid-February. CPI inflation has already risen from 4.83 per cent in March 2016 to 5.39 per cent in the last set of numbers announced. Rajan is pegging inflation to stay at 5 per cent mark by March 2017, any deviation higher in this target will set the cat among the pigeons as it would signal the leg room the governor enjoys in tweaking interest rates.
3. Non-performing assets: Finance Minister Arun Jaitley post his meeting with public sector bank chiefs reiterated the stance that the government is committed to support these banks. Post the central bank’s nudge public sector banks have been disclosing higher non-performing assets in the process of cleaning up their balance sheet. Analysts feel that though most of the mess has been cleared, it would still take a couple of quarters to completely clear the mess. Rajan’s take on the actual scenario will be keenly awaited.
4. FCNR (B) outflows: Markets, especially bond and currency markets would be eagerly waiting to hear from the governor on the steps it expects to take to prevent the country from the expected shock of outflow of FCNR-B (Foreign currency non-resident (Bank)) deposits. Between September and November 2016 the country is expected to see FCNR (B) deposits worth $26 billion maturing. The amount is large enough to rattle the bond and currency markets directly and equity markets indirectly. Though Rajan in his previous policy interaction sounded confident of handling the situations, market will be waiting for details on the hole will be filled, especially since Rajan was instrumental in bringing these deposits to save the currency in 2013.
5. Global developments: Global markets continue to face headwind, the recently announced employment numbers in the USA has caught the market by surprise. All eyes are on Yellen who is expected to give enough hints on the interest rate direction going forward. Market expectation is a status-quo will be maintained. Rajan, along with world markets would be looking to see any change in direction. More importantly, his comment on Brexit’s (Britain’s exit from Euro Zone) and its impact on Indian economy will be watched. Rajan had earlier commented that there are enough minefields to deal with and he does not need anymore.
Apart from interest rates and Rajan’s plan post his term there are many reasons to look forward to the policy for short to medium term direction.
