The Reserve Bank of India (RBI) surprised the street by keeping key policy rates unchanged on Wednesday, despite calling current inflation too high, citing the prospect of easing retail prices and its concerns about the weak domestic economy.
"The policy decision is a close one. Current inflation is too high. However, given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels, and given the weak state of the economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty," said the central bank in its mid-Quarter monetary policy review press release.
The RBI said it won't reactly overly to temporary spikes in inflation while being not complacent about it either. Raghuram Rajan while speaking to reporters in a press meet also said the central bank could intervene
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RBI surprised the street by keeping its main lending rate i.e the repo rate unchanged at 7.75% after mid-quarter monetary policy review. Your take on this?
I think they have merely postponed the rate hike momentum. RBI seems to be keeping its ammunition once Fed taper starts
Was the policy in-line with your expectations and how do you expect market will react to Fed's decision?
No, we too were factoring in a 25bps hike. This was a surprise. That said, the decision seems fine in light of the impending taper worries. Regarding taper, markets will get worried if the taper is aggressive. If the taper comes at US$5 bn or US$10 bn initially and then tone is not hawkish then Indian markets should be alright
RBI has changed its stance saying it won't act on every spike in inflation? Will this bolster India Inc's capex plans owing to relative stabilisation in interest rates in the near-term?
I don't think it is fair to say that. RBI has already clarified that they would watch it for a month and then take a call. Also, I don't think capexes are planned by India Inc. on merely RBI interest rates. If the macro environment on growth doesn't improve and/or there is worry on the political scene in a few months time, then capex is unlikely to get a fillip.
How are you approaching rate-sensitive stocks now? What themes are you bullish/bearish on?
We continue to like the private sector financial space more than the public sector. We are slightly more bullish on smaller private sector bank's from a risk reward perspective. We continue to like IT, Pharma for their relative visibility on growth and also the fact that most of them have solid balance sheets. Additionally, if US and EU do improve, the opportunity for growth gets magnified. We continue to be averse to highly indebted companies/sectors as we don't think rate cycle will turn favorably in a hurry.
Is it a good time to enter rate-sensitive sectors?
If your horizon is 2 years, then we think its a great time to look at smaller private sector banks and also private sector NBFCs.
How are you viewing PSU bank stocks owing to RBI's announcements on reigning down NPAs? Do they pose buying opportunity with a slightly long-term perspective?
Some of them do. To our mind, PSUs will take some time to recoup and come back to aggressive growth mode. But you can definitely eye the upcoming FPOs of large PSU banks, which we think will be attractively priced for investors.
Food prices are expected to come down. Do you see inflation coming down going forward?
Yes, it is likely that WPI may come down in Jan and Feb owing to last year base effect. However, post that we think WPI should be back to 7% range
What is your outlook on the way forward for equity markets?
I think the next few months will be volatile for Indian equity markets. This will give investors good entry points as well. Take advantage of this and create a portfolio of quality stocks keeping 2 year perspective.
