The backdrop of the upcoming Monetary Policy Committee (MPC) decision is indeed an interesting one. For starters, globally, things are in a sombre state from an economic standpoint. The fall in global bond yields is clear testimony to the same.
Emerging Market (EM) growth continues to be sluggish. The EM-DM GDP growth gap has been narrowing. With growth concerns across the globe, it is very unlikely that we see sustained inflation pressures, including India.
Additionally, for us, the decisive political mandate at the Centre is indeed a big welcome. The market expectation of continuity in reforms is now quite legitimate.
The political uncertainty being out of the way, focus now turns to monetary measures. CPI inflation in India is still below the targeted range. Growth concerns continue to linger on.
Credit availability to the real sector is still patchy. Liquidity woes in the banking system are far from over. A silver lining though is the expectation of government spending, which is likely to reduce the liquidity deficit in the system.
Also, the currency in circulation, which had shown sharp spikes due to elections, is also likely to gradually recede, impacting liquidity favourably.
Given the global and domestic scenario, the MPC may well choose to gratify the markets with a benchmark rate cut.
What is more important for markets is the MPC guidance than the actual rate action. What would give some indication to market w.r.t the future stance likely?
It indeed would be an icing on the cake for markets to see a change in stance to accommodative, which could be more potent than a rate action itself.
Either way, the downbeat sentiment in bonds seems to be reversing course for now. This positive sentiment is likely to sustain, though it may be too premature to expect yields to fall at a frantic pace.
Given the current positive undertone, any negative surprises from crude price rise and/or fiscal deficit overshoot, etc. could hamper the rally.
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