RBI is on a very tactical course on policy rate, similar to 2013-14 when Rajan was at the helm.
RBI is on a very tactical course on policy rate, similar to 2013-14 when Rajan was at the helm.
Nearly two years after Urjit Patel assumed charge as RBI Governor after Raghuram Rajan was denied a second term by the Modi government for his persistent hawkishness over inflation, a top debt market money manager says Patel is only following in the footsteps of his predecessor.
RBI is on a very tactical course on policy rate, similar to 2013-14 when Rajan was steering India’s money policy amid a war in the currency market and rapid withdrawal of FII money following the so-called taper tantrum, says Amandeep Chopra, who manages a corpus in excess of Rs 93,000 crore as Group President and Head of Fixed Income at India’s oldest fund house UTI Mutual Fund.
Inflation, at that point, was hovering at over 9 per cent. Rajan steadfastly kept a tight leash on cash flow in the economy amid constant pressure from the government and industry to ease up and propel growth. He held the stick to make lenders smoothen policy transmission and oversaw a change of era at the central bank to make rate setting more democratic by bringing in a monetary policy committee (MPC).
Even in that cycle, there were just three rate hikes, recalls Chopra. “You don't have to hike rates 5 or 10 times to stem price rise,” he adds.
On June 6, RBI hiked the repo rate by 25 basis points, but surprised markets by maintaining a neutral stance, which Chopra says was done to moderate the extreme level of hawkishness.
“It means we are not really in a tightening cycle. RBI will be raising rates, but that will be extremely data dependent. We are not back to the phase seen during 2009 or 2013, when every policy meet meant a rate hike. We are not looking at multiple rate hikes now,” he says.
As a money manager, Chopra is rated CPR1 and CPR2 by Crisil for the funds he manage, meaning very good performance and good performance, respectively, in his peer group. Three of the funds he manages – UTI Liquid Cash Plan, UTI Liquid Cash Plan-Institutional and UTI Bond Fund – have won awards for their stellar performance. UTI is India’s sixth largest fund house in terms of asset size.
Chopra, who has been with UTI AMC since 1994, says RBI’s latest stance should help improve market sentiment and make foreign investors sit up and take note of India as an economy where the central bank is very focussed on bringing down inflation.
A similar positioning had helped Rajan stand out globally for holding the economy steady through the turmoil of taper tantrum.
Chopra expects at best three more rate hikes by RBI this year, out of which one has already materialised. “Two more hikes will lift the repo rate to 6.75 per cent. Our inflation outlook, even at higher crude price, is 5.5-5.75 per cent, from where it should start moderating. That should leave us with a headroom of 100 bps on policy rate,” he says.
Anything more will be warranted only if the inflation outlook needs to be relooked at, and it heads above 6-6.5 per cent, Chopra explains. In its latest policy review, RBI hiked inflation projection to 4.8-4.9 per cent for the first half of FY19 from an earlier 4.7-5.1 per cent and to 4.7 per cent from 4.4 per cent for the second half.
India’s consumer price inflation spiralled to 4.87 per cent in May, which has already prompted economists to pencil in another rate hike as early as August. A third hike, says Chopra, may be warranted if crude oil goes back to $80.
An imminent hike in minimum support prices for crops is being seen as another major risk to inflation. Chopra says based on what the expert panel has recommended, his own calculations show MSP hike will add anything between 50-60 bps to headline inflation, as the CPI index has a large component of cereals in it.
“But the headline news about farmer protests and dumping of crops are alarming, as they suggest farmers are not happy with the current price levels. This can develop into some kind of political compulsion and MSP hike could actually become very aggressive and beyond what is being recommended. This is what has been bothering markets,” he says further.
Politics has become a dominant factor for India’s financial markets this year. Question marks over the incumbent government’s ability to deliver on the nation’s expectations of faster growth and job creation and emergence of new political alignments give rise to uncertainty about a possible return of the market-friendly Modi regime in the 2019 general elections.
But Chopra does not think it’s a big worry. “At a broad level, India’s politics is more or less aligned with economic realities. It does not matter if there is a shift in the government; the political agenda will eventually align itself to broad economic agenda. You need to have your country continuing to grow at a certain rate to sustain some level of employment and uplift of people's well-being. Otherwise, you will only end up creating more stress and protests. That's the compulsion,” he says.
But markets will be concerned if a change in regime brings about a shift in near-term policies. “Because, markets prefer continuity. For instance, they won't want the insolvency process being modified or slowed down, or a reversal in the bank clean-up process which may again weaken the banking sector. Sudden discontinuity of all these is what makes the market a bit concerned,” adds Chopra.
As the rupee continues to reel under acute pressure amid a steady outflow of foreign portfolio money, Chopra says the worst is behind us.
“I think the rupee is being influenced more by our widening current account deficit and the broader view around the strength that developed market currencies will see over the next few quarters as they see strong growth and the policy tightening. The rupee is not the only currency weakening, other emerging market currencies are seeing similar fate,” he reasons.
Chopra expects the domestic currency to move in a 50-paise band around the 68 mark in the current environment. “Incrementally, we are not looking at meaningful depreciation from here on,” he predicts.
Globally, central banks like the US Fed and the ECB have prepared financial markets for tightening well ahead. While this clarity in communication has helped avoid wild volatility in markets, Chopra says it still calls for caution as these policy stances are dependent on certain variables.
“When these variables start changing, markets will see volatility despite the central banks' paths being defined,” cautions Chopra.
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