Every known event related to financial markets tends to create ripples either pre or post event. The Monetary Policy Committee meeting (MPC) is one such event which draws interest not only in India, but across the globe. This time, the MPC meeting assumes significance for a few reasons. For starters, this is the first policy meeting after the stance was changed from neutral to accommodative. Next we had the US FOMC (Federal Open Market Committee) vote for a rate cut – a first in past 10 years. Key here to monitor if this is the start of rate cut process or just a one off action. Additionally, the global economy continues to remain sluggish, with India not being an exception. Global bond yields in negative territory are now at around $13trillion. Very recently, the Swiss bond yield fell below zero, implying the entire Swiss government bond curve is now negative!
The geo-political situation also continues to be fluid, which is leading to renewed buying in safe haven assets like gold. Central bankers across the world including the likes of China, Russia, Poland etc. seem to be buying gold as part of their portfolio. We have seen economies like Brazil and South Korea reduce policy rates very recently, which has surprised markets both in terms of quantum as well as timing.
Back home, the crisis of confidence in the credit markets continues and is unlikely to abate in a hurry. Past rate cuts have clearly not had the desired degree of transmission in the real economy. The consumer inflation (read CPI) continues to undershoot RBIs target and hence doesn’t seem to be a threat for now. The deficit liquidity has gradually morphed itself into positive liquidity, which has rendered some support to the yield curve, especially at the short end. This could be one of the hygiene factors apart from low interest rates needed for growth.
The real interest rates in India still continue to remain high as compared with most emerging as well as developed economies across the world. Additionally, foreign investor participation in India bonds as percentage of total bond outstanding at ~3.3% is among the lowest in the world. The relatively favourable fundamentals have led to foreign investors being net buyers for the past 2 months of CY 2019. The yield behaviour in the bond market is suggesting yet another rate action (read cut) in the upcoming MPC meeting. The overnight rates are trading below the benchmark repo rate, which is another cue to watch out for.
There is an urgent need to pump prime the investment cycle in India to get back to a sustainable growth path sooner than later. Additionally, since there is nothing ominous from macro data perspective- both global and domestic, the policy makers could well gratify the markets with a 25bps cut in repo rates. It is prudent to have the hygiene checks in place to support the overall growth targets that we as a nation have set for ourselves.
(This article has been written by Lakshmi Iyer, CIO (Debt) & Head –Products, Kotak Mahindra Asset Management Company. The views expressed are authors’ own)