13 Dec 2014

Investors expect monetary easing

Foreign investors are clearly positioning themselves for monetary easing, with steady buying of cash equities, but even heavier buying of fixed-income securities: government bond yields have been under pressure and trade at a discount to the repo rate. There was some speculation that the RBI might kick-off rate-cutting at the December policy review. In the event, the optimists were frustrated but the RBI commentary turned notably doveish, suggesting rate cuts early in the New Year, possibly without waiting for the next policy review in February. The market widely expects 50 basis points of cuts next year but Deutsche Bank is now predicting as much as 100 basis points. Overall, if inflation tracks within the RBI’s target range, historic evidence suggests there is room to cut as low as the 5% range, providing sustained support to capital investment and hence equity markets over the medium term.

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