Today we had a note coming in from well known global strategist Christopher Wood who says that after RBI got a new governor, markets are pricing in easing in the policy. He also says that real rates are particularly high in India and that is why easing can be done in the near term What is your view?
Markets are definitely pricing in change in stance. Step one may happen as early as Feb or April if oil prices sustain at these levels. More important, you should also factor in the fact that there has been a large change in the stance of the US Fed itself. If you look at the last policy, the FOMC was indicating at least three rates hikes in 2019 and the recent statements are pointing towards one or max two rate hikes after the December rate hike.
There is a change in global backdrop for interest rates, for the movement of US dollar and that bodes really well for EMs, particularly India. which is current account deficit country and requires FPI inflows.
WPI, CPI data show that inflation is running way lower than RBI anticipated. How should one look at any rates that should be expected going ahead?
The current reading is again little bit lower than the RBIs trajectory and that shows that the RBI is indicating a 4% trajectory in H1 of FY20 and the Q1 reading could be as low as 3.5%. On an overall basis for the year, you would still see a sub-4% print but it would be not way below 4% to justify a large amount of easing.
At the same time, if you look at some of the components of core inflation, they are running at 6 odd percent. So on balance, some easing is possible but given that the RBI itself is pointing out that output is close to potential level, there is not a large scope for easing as you move ahead unless and until inflation really surprises on the downside.
Right now, it is looking to be somewhere between 3.5% and 4% in FY20. If it surprises on the downside say to sub-3.5%, it opens up a very large room for easing. Otherwise, there is limited room for easing.
If RBI were to cut rates looking at domestic concerns, there was a very real possibility of capital flows reversing in a much bigger way than they already are , particularly debt flows. What is your view?
There has always been this contraction but for an emerging market like India. equity and FDI inflows are driven more by growth than anything else. FPI inflows into debt markets have been recent and they are not that large in amount or part of the overall share of FPI inflows and FDI inflow that India receives.
Growth capital might pick up if you see growth improving compared to the debt flows which may not pick up to that extent.