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15 Jan 2015
RBI rate cut to reinforce positive INR outlook – WIB
FXStreet (Barcelona) - Jonathan Cavenagh of Westpac, notes that today’s surprise rate cut by the RBI reinforces a positive outlook on the INR and also improve confidence of a further rebound in Indian economic activity.
Key Quotes
“Today's rate cut by the RBI will come as somewhat of a surprise to the market and will reaffirm a positive flow backdrop into Indian securities. Our analysis of foreign inflows into both Indian debt and equity securities is that they are positively correlated with lower Indian rates. Foreign holdings of Indian debt continue to climb and while today's move lowers nominal rates, real yields remain very elevated thanks to the sharp drop in inflation outcomes, which will continue to drive demand for local bonds.”
“We have seen a modest net outflow from Indian equities since the start of this year but such a trend has been evident in other EM Asia markets. Further outflows could occur, particularly against a backdrop of broader market risk aversion but our expectation is that any further outflows from India will still be relatively modest compared to other EM Asia markets.”
“Today's rate cut should improve confidence of a further rebound in economic activity, which, all else equal, should be a positive for Indian equities.”
“The point we would note is that we were already more positive on the INR outlook ahead of today's announcement. Lower inflation pressures seem well entrenched and today's rate cut should boost the activity outlook. Hence there seems a strong likelihood that the stagflation proxy can trend down further and remain below 0 well into 2015. Such an outcome will be INR positive.”
Key Quotes
“Today's rate cut by the RBI will come as somewhat of a surprise to the market and will reaffirm a positive flow backdrop into Indian securities. Our analysis of foreign inflows into both Indian debt and equity securities is that they are positively correlated with lower Indian rates. Foreign holdings of Indian debt continue to climb and while today's move lowers nominal rates, real yields remain very elevated thanks to the sharp drop in inflation outcomes, which will continue to drive demand for local bonds.”
“We have seen a modest net outflow from Indian equities since the start of this year but such a trend has been evident in other EM Asia markets. Further outflows could occur, particularly against a backdrop of broader market risk aversion but our expectation is that any further outflows from India will still be relatively modest compared to other EM Asia markets.”
“Today's rate cut should improve confidence of a further rebound in economic activity, which, all else equal, should be a positive for Indian equities.”
“The point we would note is that we were already more positive on the INR outlook ahead of today's announcement. Lower inflation pressures seem well entrenched and today's rate cut should boost the activity outlook. Hence there seems a strong likelihood that the stagflation proxy can trend down further and remain below 0 well into 2015. Such an outcome will be INR positive.”