Fourth Bi-monthly policy October 2019 Highlights

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Dovish view with inclination towards further rate cuts going forward.

Key Points

  • Policy repo rate reduced by 25 bps to 5.15%, reverse repo at 4.90% and MSF at 5.40%
  • Monetary Policy stance remains “Accommodative – As long as it is necessary to revive growth, while ensuring that inflation remains within target”.
  • CPI inflation projected at 3.4% for Q2:FY20 and 3.5-3.7% for H2:FY20, with risks evenly balanced.
  • GDP growth forecast reduced to 6.1% from 6.9% in FY 19-20, and in the range of 6.6-7.2% for H2:2019-20 with risks evenly balanced.
  • Liquidity to be Neutral-Positive.

Inflation

Retail inflation remained in a narrow range of 3.1-3.2% between June & August, driven by food inflation, even as fuel inflation and CPI inflation excluding food & fuel moderated.

Factors shaping inflation path- 

  • With above average monsoon, Kharif production is estimated at close to last year’s level, auguring well for the overall food supply situation.
  • RBIs forward looking survey point to weak demand conditions, with indications of softening of output prices in Q3:2019-20.
  • Geo-political uncertainties affecting oil prices may provide upside risks to the inflation outlook.
  • Three months and one year ahead inflation expectations of households polled by the Reserve Bank have risen
  • Currency depreciations in several emerging economies.

Liquidity

  • Liquidity in the system was in surplus in August-September 2019 despite expansion of currency in circulation and forex operations by the RBI draining liquidity from the system.
  • Reflecting easy liquidity conditions, the weighted average call rate (WACR) traded below the policy repo rate (on an average) by 8 bps in August and by 6 bps in September.

Current Account Deficit and Forex

  • Trade deficit narrowed during July-August 2019. Higher net services receipts and private transfer receipts helped contain the current account deficit to 2% of GDP in Q1:2019-20.
  • On the financing side, net foreign direct investment rose to US$ 17.7 billion in April-July 2019 from US$ 11.4 billion a year ago.
  • India’s foreign exchange reserves were at US$ 434.6 billion on October 1, 2019 – an increase of US$ 21.7 billion over end-March 2019.

Domestic Growth outlook cut to 6.1%

  • Growth in GDP slumped to 5% in Q1:2019-20, extending a sequential deceleration to the 5th consecutive quarter.
  • Real GDP growth for 2019-20 is revised downwards from 6.9% in the August policy to 6.1% – in the range of 5.3% in Q2:2019-20 and in the range of 6.6-7.2% for H2:2019-20 with risks evenly balanced.

Factors that will influence growth

  • Various high frequency indicators suggest that domestic demand conditions have remained weak.
  • The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q3.
  • Export prospects have been impacted by slowing global growth and continuing trade tensions.
  • Impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand.
  • Several measures announced by the Government over the last two months are expected to revive sentiment and spur domestic demand, especially private consumption.

Assessment of Global Growth

  • Global economic activity has slowed down since the meeting of the MPC in August 2019, amidst elevated trade tensions and geo-political uncertainty. The Institute for Supply Management’s index for September indicates that manufacturing slipped further into contraction to touch its lowest reading in a decade
  • Economic activity remained weak in major emerging market economies, pulled down mainly by a deteriorating global environment in Q3.
  • Crude oil prices were pulled down by softer demand, amidst adequate supplies in early August. Prices remained range bound until mid-September when supply disruptions on account of an escalating geo-political conflict resulted in a spike which has abated faster than expected
  • Gold prices remained elevated on safe haven demand.
  • Central banks became more accommodative with inflation remaining below targets across major AEs and EMEs

MPC voted 5-1 in favour of cutting Repo rate by 25 bps, while 1 member (Dr. Ravindra Dholakia) voted to reduce the policy repo rate by 40 bps.

Other Key Announcement

  • RBI Increase the household income limit for borrowers of NBFC-MFIs from the current level of Rs. 1 lakh for rural areas and INR 1.60 lakh for urban/semi urban areas to INR 1.25 lakh and INR 2.00 lakh, respectively. Raise the lending limit from INR 1.00 lakh to INR 1.25 lakh per eligible borrower.
  • Reserve bank have allowed banks to freely offer foreign exchange prices to non-residents at all times, out of their Indian books. Also, rupee derivatives (with settlement in foreign currency) to be traded in International Financial Services Centres.

Debt Market View

  • RBI reduced policy rate by 25 basis points from 5.40% to 5.15% and maintained its stance at “Accommodative” in order to strengthen domestic growth impulses by spurring private investment which has remained sluggish.
  • Growth is faltering, Inflation is comfortably below the RBIs target, Brent crude prices are in a comfortable zone and Liquidity continues to be in surplus zone.
  • Global central banks are increasing moving towards dovish stance.
  • With tax forgone because of Corporate tax cut, Fiscal deficit target remains a challenge. Lower GST and Direct tax collections also pose threat in achieving Fiscal target
  • High Real-rates continue to make debt an attractive asset class
  • We suggest products having maturity close to investment horizon having highest credit quality and lowest expense for investors having less than 1-year time horizon.
  • For a 3-year investor, we recommend allocation in 1-5-year average maturity segment with high credit quality portfolios mainly focused on accrual. The high-quality PSU and corporate bond spread over G-Sec is attractive
Disclaimer: This note is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This note does not constitute an offer, invitation or inducement to invest in securities or other investments and Wealth Managers (India) Private Limited is not soliciting any action based upon it. Wealth Managers (India) Private Limited or any employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Mutual Fund Investments are subject to market risks. Past performance is not an indication of future. Please read offer document carefully before investing. For commission disclosure refer to our         Website www.wealthmanagersindia.com

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