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India: RBI on hold, but remains accommodative - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 3, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Nomura, notes that the Reserve Bank of India (RBI) kept the repo rate unchanged at 6.75%, in line with expectations but Nomura expects a 25bp rate cut in April.

    Key Quotes

    • “The RBI projects CPI inflation to be below 6% in January 2016 and around 5% by Q1 2017, though this does not factor in the impact of the seventh pay commission.

    • It projects FY16 GVA growth at 7.4% with a downward bias, with growth picking up to 7.6% in FY17 (revised down from 7.8% in September).

    • In its guidance, the RBI reiterated that even though rates were unchanged today, it remains accommodative and is awaiting clarity on (1) the evolving inflation trajectory and (2) structural reforms in the budget. At the same time, it emphasised the importance of macroeconomic stability for sustainable growth, indicating that aggressive easing to lift growth temporarily is unlikely.

    • In the post policy call, the RBI stated that it is (1) reviewing the current liquidity framework; (2) it may allow banks to include non-recognisable assets (such as real estate) towards capital requirement under Basel; and (3) the government is committed to recapitalise public sector banks adequately.

    • We expect the RBI to deliver a 25bp rate cut in April. Thereafter, we expect the RBI to stand pat as we do not expect CPI inflation to undershoot the RBI’s 5% inflation target on a sustained basis in the backdrop of an ongoing recovery and still-high inflation expectations.

    Rates strategy: We believe the rates market’s focus will shift to local factors, especially the FY17 budget. On bonds we recommend staying long in the 5yr part of the curve. In NDOIS, we recommend taking profit on the 1s5s and 2s5s flatteners and instead initiate a 1s2s flattener (1.33:1; extra weight in 1yr).

    FX strategy: The RBI’s – and consequently the market’s – focus on the Union Budget makes it a prominent risk event amid weak global sentiment. Nonetheless, fundamental dynamics continue to support our view of medium-term INR outperformance, accentuated by weakness in oil prices.”
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