Although there is a pause in rate hike, there are indications that it could be one of many depending on the global trend scenario. How would you analyse RBI’s move in context of the global trend?
To start with, we were an outlier in the market. We had expected a pause in the policy. The RBI has done a cumulative of 290 basis of effective tightening in the system and from 3.35%, the operating rate is now at 6.25%. It takes time for raised rates to percolate into the real inflation numbers. Also given that the repo rate is already ahead of the current inflation number, it is not that any further rate hike would have helped the economy in any which ways or tackle the inflation in much harder ways than it already has.
RBI sounded off concerns on fragility of the financial system globally. Now those concerns are for real. It is not that we can remain aloof from what is happening around in the world, especially the sentiment side of it. Given that expensive money will have its impact on credit growth going forward, if that is combined with sentiments would not bode well for the growth of the economy.
We have to remember that in 2022, the RBI front loaded the rate hikes to tackle inflation head on. Once the animal of inflation is under control, it cannot give away the goal of growth. Nurturing and fostering growth over a longer period is also very important. In that backdrop, given that global financial markets are passing through a bit of turmoil, it is a wise thing to give one self some time, see off the volatility in the market, see off the fragility in the market and thereafter, have a fresh look at the numbers and how the trajectory is unfolding.
That is how today’s policy was expected, at least on our side and that is how it has largely been portrayed. I think it is not a one-off given the trajectory of inflation that RBI has printed. We really have to have an out of whack negative shock on inflation for rate hikes to be back on the table.
Beyond that, I think we are done when RBI says it is a one-off, it is a pause and not a pivot it basically means on a timeline and not on the scale of rates going up or down. So the pivot point in terms of absolute number is close. In terms of timeline, it might be slightly away, but definitely as far as our reading goes, we do not anticipate any further rate raise.
What about the currency weakness? Do you think the pause will impact the currency movement and maybe a hike would have stopped the weakness?
Not really. I mean, yes, at the margin, one can say a hike would have slightly been more favourable towards the rupee, but there is no material change that a hike or a non-hike has done to the currency. Given that our deficit numbers have improved significantly, the exports have increased and imports have also been managed well.
Also, combined with the fact that we are among the favoured EMs, the flow of money is okay. The trade pacts are going okay. So I do not see the interest rate defence wall being needed to heighten to manage currency. In fact, if anything has to go, we have already reached a height of defence wall, which is apt and optimum. I do not see any reason why RBI would have been too concerned about the Indian rupee and then use rate as a defence.
What is your take on the bond yields?
For now, we will be in 7.15-7.25% zone. But going ahead, 6-9 months down the line, we should be moving towards a 10-year benchmark; G-Sec should be moving towards 7% or lower. Our entire premise is that as inflation comes down, every policy will give you a 12-month forward pan chart.
As soon as we see the 12-month forward inflation number moving sub 5%, at that point in time, one cannot have a policy rate of 6.5%. You will be looking at or discounting a repo rate cut then, which means it has to translate into market yield. So towards the end of the financial year, maybe at the end of Q3, Q4, we see 10-year G-Sec sub 7%.
As far as steepening goes, we see a parallel shift in the system, given that the withdrawal of accommodation continues to be the stance and RBI has said that liquidity is an important parameter of accommodation or withdrawal of accommodation. We believe liquidity will remain very closely managed in such a way that RBI keeps operating rate the way they want policy efficacy to be. In that sense, the short-term curve might not react as sharply as it did on Thursday. We expect a parallel shift in yields and not a steepening or a flattening going down the line.
Time to lock in money for a longer term now in fixed income. What do you suggest?
It’s time to lock in money for longer durations both on absolute and relative basis.The study is simple. Ever since MPC formation in May 2016, the paradigm of interest rate setting has changed. From then till now, 10-year G-Sec has largely traded in the range of 6% to 8%. Currently at 7.20-7.25% zone, we are at 65, 70 percentile cheaper prices.
Related to the inflation dynamics that have emerged in the country, when we were a 9% inflated economy, we used to trade at 7.5%. When we were an 8% inflated economy, we used to trade at 8%. When we were a 7% inflated economy, we used to trade at 6.5-7%. We are a 6.5% inflated economy going ahead. If we are going to be a 5.5% or a 5% or a 4% inflated economy, we are not going to get these yields.
So go for the longest durations possible. It will take time for interest rates to come down by a great deal, but over a period of time, we will see inflation coming off and interest rate yields or yields coming off across the entire duration curve. We can choose depending upon the investment horizon and risk appetite, I would say go in for the longest duration.
