Friday, Oct 24, 2014

Go long on duration strategies in bonds, overweight on equities

On a longer time-frame, RBI is expected to cut rates by up to 75 basis points. On a longer time-frame, RBI is expected to cut rates by up to 75 basis points.
Written by Anil Sasi | Posted: August 4, 2014 12:32 am | Updated: August 4, 2014 10:16 am

For those struggling with high interest rates on their home loans and the ones planning to take on a car loan, the long wait for a softening of the interest rate regime is only expected to get longer. Analysts are almost unanimous in their view that the Reserve Bank of India (RBI) is likely to leave its benchmark interest rates unchanged in its upcoming review on August 5. An easing of its monetary stance is unlikely until early next year on fears of food inflation spiking in the wake of the deficient monsoons.

There could be three compelling reasons for this view:
Cumulative monsoon deficiency of 24 per cent has led to a buildup of food price pressure.
* The impact of hike in railway fares is yet to translate fully into inflation pressure.
* Through crude oil, India remains exposed to ongoing geopolitical unres.t

On a longer time-frame, though — i.e. between now and mid-2016 — the central bank is expected to cut rates by up to 75 basis points. While worries that the country could face its first drought in five years have receded marginally after rainfall increased in mid-July, the poor start to the monsoon has forced farmers to postpone summer sowing. The reviews subsequent to the upcoming one on August 5 is likely to have better clarity on this and expected to factor it in.

“Even though the headline WPI and CPI have eased over the last few months, and the intensity of monsoon rains has picked up after a weak start, rainfall-related concerns persist as a source of risk for the inflation outlook,” said Aditi Nayar, senior economist at ICRA. The RBI is targeting retail inflation of 6 per cent by January 2016. Inflation, measured by the CPI, eased to 7.31 per cent year-on-year in June. Analysts assert that with the target so stiff, the room for the central bank to cut rates is sharply reduced.

In its last policy review in June, the RBI had kept the repo rate — at which it lends to the banks — unchanged at 8 per cent. Exhibiting signs of revival, India’s manufacturing activity, gauged by the index of industrial production (IIP), had risen to 19-month high of 4.7 per cent in May on account of improved output from mining, power and capital goods sector. However in its June policy, the RBI offered some respite by cutting the statutory liquidity ratio (SLR) by 0.5 per cent to 23 per cent that allowed banks to have an additional Rs 40,000 crore and expanded their scope for more freedom to give credit to non-government sector.

On rates, clearly, the RBI is unlikely to yield this time round. The chairperson of the country’s largest lender, State Bank of India, Arundhati Bhattacharya last week had said that the continued…

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