Moneycontrol Pro Panorama | RBI skips again, markets yawn

RBI Governor Shaktikanta Das. (File image)

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Financial markets lost their mojo following the Monetary Policy Committee's decision to maintain “status quo” both on rates and policy stance at its June meet. The MPC left repo rates unchanged at 6.5 per cent while continuing with “withdrawal of accommodation”.

Governor Shaktikanta Das’ speech was bullish on growth while repeated mentions of the need to keep an “Arjuna’s eye” on inflation indicates a hawkish tone. Price stability has been and will continue to be the focus, given that headline inflation remains above the target of 4 percent. Given the RBI’s projection of a 5.1 percent inflation in FY2024, there’s little hope for a rate cut this fiscal. Aparna Iyer analyses why RBI’s pause is a pivot killer.

The status quo policy decision did not move the needle much in 10-year bond yields. Experts reckon that yields may be range bound in 6.9-7.2 percent, until RBI changes rates. Pankaj Pathak, fund manager-fixed income, Quantum Mutual Fund, expects bond yields to move up from current levels, given the pricing for uncertainty around the monsoon and inflation impact of higher than usual increase in minimum support prices for the kharif crops.

What’s more helpful for investors is that India’s gross domestic product (GDP) growth is in a sweet spot. With growth rates getting broad based, the rural economy showing improvement on the back of a better rabi crop and urban consumption and investment being resilient, the 6.5 per cent forecast for FY2024 looks reasonable.

Today’s lacklustre reaction of equity markets to the policy may not be of much consequence. It comes on the back of a strong rally in the past few months. The market capitalisation-to-GDP ratio of about 97 indicates that the markets are modestly overvalued.

That said, the strong inflow of foreign institutional investors shows India is better placed than other emerging and developed markets -- India is slated to be the fastest growing economy in FY2024. Indian economy’s growth is robust and will continue to be higher than most other economies, says Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, in an exclusive interview to MCPro published in yesterday’s edition.

After a cumulative rate hike of 250 basis points since May 2022, the pause also brings relief for home and vehicle buyers and thus keeps the wheel of consumption rotating, while supporting private sector capital expenditure.

With a pivot unlikely before February 2024, the focus will shift to corporate earnings. A report by Motilal Oswal Financial Services says India’s earnings cycle has seen a smart turnaround after almost a decade. “Nifty exited FY2023 with an 11 per cent EPS growth on a high base of 34 per cent growth in FY2022,” it says. Expectations are of a 15-20 percent earnings expansion in the current fiscal, with the only headwinds coming from a major global recession that might see the domestic economy faltering before it bounces back.

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Technical Picks: JSL, Bajaj Finance, Coriander, United Breweries and
IRCTC (These are published every trading day before markets open and can be read on the app).

Vatsala Kamat Moneycontrol Pro