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RBI has maintained status quo, in terms of key rates. What are your key takeaways from the monetary policy review?
Before embarking on any other policy measure, the RBI governor wants to give more time to the policy action taken till now. Another important aspect is he wants to closely watch the disinflationary factors at play before taking any decision.
Do you think RBI wants to be deliberately behind the curve, in terms of fine-tuning its policy stance, given the FOMC (Federal Open Market Committee) taper could be round the corner?
Our assessment is while fears of the US Federal Reserve (US Fed) tapering continue, domestic inflation from the supply side is being tracked on a broader range, rather than recent data. While monetary policy actions will be data-dependent, inflation’s long-term trajectory will be the guiding point. The central bank does not want to react to every inflation number being released without being complacent at the same time.
How close are your estimates for inflation (Wholesale price Index and Consumer Price Index) to RBI’s projections? Is laying so much emphasis on vegetable prices justified or is it intended to soothe nerves, as the country gears up for the 2014 general election?
High vegetable prices give rise to inflationary expectations. We feel WPI inflation will remain at 6.5-7.5 per cent, while CPI inflation will be about 10 per cent, with wider moves of one per cent around it.
In case food inflation doesn’t come off, CPI inflation may head higher from the current level of 11.24 per cent. Hence, too many rate rises will be contested at this juncture of slow growth. Retail inflation has to come off sharply and remain stable for a long period to improve savings growth within the financial system.
How do you see the rupee and bond yields panning out in the near to medium term? What is your advice to investors at this point?
The rupee might stabilise, as demand and supply match and as CAD (current account deficit) declines. A pick-up in exports is likely, as growth returns in developed economies.
In India, bond yields for shorter maturities might move lower, as the yield curve steepens with improving liquidity. The yields of longer maturity bonds, however, will be under pressure, considering inflation fears and the possibility of rate rises in the future.
Government security yields might come off from here in case the government does not indulge in extra borrowings and sticks to the budgeted fiscal deficit target, and the borrowing programme comes to an end.
Is it advisable for those in the highest income tax slab to invest in fixed-maturity plans or tax-free bonds?
Given the fears of inflation, the possibility of rate rises along the way and rising rates after US Fed tapering, fixed maturity plans are ideal. The yield curve might steepen and the yields of longer-maturity bonds, including tax-free bonds, may rise from the present levels.
