What are your expectations from the policy and how have you read the economic indicators
If we look at core inflation, it has been largely flat except for WPI. If nothing changes, one may expect RBI to hold rate. We are awaiting guidance from the monetary policy committee. Our expectation is that inflation would move downward, both CPI and WPI headlines. By March, we could see closer to 9% CPI and 7% WPI. Core, however, is proving to be stickier, and we expect it to be around 8%. We also need to assess the situation based on what the Urjit Patel committee chooses as an anchor.
Do you think data have vindicated the RBIs move to hold rates in last policy
Firstly, the governor was pointing out to the disinflationary forces and said we need to let these play out. Secondly, we should not respond to the sharp food-driven changes in inflation. While RBI continues to remain vigilant on inflation, it has re-emphasised the disinflationary nature of the growth trajectory as well as the fact that inflation could come down. RBI was simply saying the process had started and we should wait for that to reflect in the headline numbers. And that had happened. It was indeed good to wait.
What is your outlook on bond yields
The market will stay range bound. Only thing one can say is that the trigger for a sharp upsurge in yields is relatively muted. The market is seeing not too many negatives on inflation up to March and, therefore, we may not see yields moving dramatically beyond 8.80-8.90%.
Given the stability of the currency, shouldnt the cap on repo borrowings be lifted
The cap on repo tender is here to stay and not to protect the currency anymore. It is here to stay because it is giving a series of measures by which the price and quantum of liquidity can be controlled. Now, the lessons in last few quarters are that if the amount of liquidity is controlled, the rate at which it moves can be changed. To that extent, the policy rationale has been that liquidity is there but the pricing has to be changed. The RBI has moved away from the fact that this was originally for managing the currency. They have articulated the change in the stance as well. They have also introduced term repo.
The RBI governor has been saying that eventually they would like the repo rate to be the operative rate.
It depends on how much liquidity is there in the system. If you look at the past few months, there have been times when the liquidity has been very comfortable and the operative rate slips down. It moves between the repo and the MSF, but primarily it has been closer to the MSF rate.
What is your outlook on the exchange rate
If you see the rupee's trajectory, we are in a very different situation now than we were in May. When the tapering announcement had first come from the Fed, the currency did not move much. The rupee at this point has a floor of 60-62/$. I think current account is looking much better with the gold curbs and increase in exports. Capital flows because of FCNR have given a reasonably good level of support.