This credit policy was supposed to have been special. And special it was as the Reserve Bank of India surprised the market by maintaining status quo on all the monetary policy variables.
With the recent sharp drop in the India 10-year yield and a rise in the US 10-year yield, the gap between the two has fallen to a very slender 3.8 percent, compared to historical levels of around 5-6 percent.
The momentum in the India 10-year yield was contrary to the trend in yields across other emerging markets. This was also probably leading to foreign investor selling in debt market, where the outflows from the debt segment have amounted to $2.8 billion from November 9th till date. Cumulative outflows from the debt and equity market amount to $7.8 billion. This factor and uncertainty could have also led to the RBI moving into a cautious wait and watch mode.
Where Are We On The Interest Easing Curve?
First, there is nothing in the policy that might lead us to believe that the RBI has abandoned its “neutral stance” of liquidity, even as it has rolled back the incremental 100 percent cash reserve ratio (CRR) rule. The RBI now has more tools such as the market stabilization scheme (MSS) to manage the system liquidity.
Our own inflation estimates indicate a reading of headline CPI at 3.65 percent for November, but rising to close the year at 4.6 percent. The average inflation reading in Q4 FY17 is at ~4.5 percent, lower than the RBI’s expectation of 5 percent.
Thus, the RBI might yet not be finished with its easing cycle, and the current issues at home and abroad could have merely delayed them.
However, even as we continue to see the RBI reducing the repo rate by a further 25 bps, the probability of this happening in February might not be an absolute certainty and might be delayed till April. The RBI will continue to assess the emerging landscape – both domestic and global – for any further decision on rates.
Indranil Pan is Group Chief Economist at IDFC Bank Ltd. The views expressed above are his own.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.
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