Lakshmi Iyer Kotak Mutual Fund
Its been barely 60 days since the previous Monetary Policy Committee (MPC) meet, but there seems to be a V-turn in what the bond market is expecting from the committee on December 5.
What really caused this sentiment to change? Well, one of the factors is oil, which for a change, is not on the boil.
Since early October, crude oil prices have corrected by over 25 percent. Crude oil is an important item in our import bill and a fall in oil prices is definitely is music to India Inc's ears.
The drop in prices of crude oil has also had a positive impact on the Consumer Price Index (CPI)-based inflation, which has been a non-negotiable area for the central bank.
While the headline CPI for October came in at 3.3 percent, core CPI edged up to 6.2 percent from 5.8 percent in the previous month. This does warrant some vigilance.
The rupee too seems to be basking in the glory of falling crude prices, appreciating around 5 percent in November.
Bond yields have eased by over 40 basis points (10-year benchmark yield currently at 7.62 percent) since the last MPC meeting (8.08 percent on October 5), reflecting that some of the pessimism is being reversed.
Of course, liquidity will play a critical role in shaping the direction of long-term bond yields. So far in FY19, the RBI has announced open market operations (OMO purchases) of Rs 1.66 lakh crore.
Whether or not there is more continuity for OMOs in sight is another question that the market will be seeking an answer for.
Although headline inflation has been consistently undershooting the RBI's forecasts over the past few months, we do not see room for any easing of interest rates, at least immediately, given the rising global interest rate cycle.
We, therefore, expect the RBI to keep key rates on hold at its December 2018 Monetary Policy Committee meeting. The central bank had altered its stance to 'calibrated tightening' at its last meeting, which rules out an interest rate cut for now.
The factors that will influence the pause could be CPI inflation coming in below the RBI’s target, the recent decline in crude oil prices, and the rupee's recent appreciation.
Disclaimer: The author is CIO (Debt) & Head of Products, Kotak Mutual Fund. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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