Economic Roundup, June 08, 2018

Economic Environment

  • Oil price

  • RBI policy

How are the Indian and global economic environments affecting the financial markets?

The Indian financial markets this week primarily awaited the RBI monetary policy decision.

  • The possibility of Saudi Arabia, Russia and the United States raising their oil output to offset production declines in Venezuela and Nigeria and a possible production decline in Iran due to prospective reimposition of US sanctions has softened the oil price. Looking forward, slowing demand growth of oil in China is also expected to maintain a downward pressure on the oil price. This has come as a welcome relief to India though, despite the softening, the oil price for India still remains elevated from the standpoint of India’s current account deficit and pressure on the rupee and inflation as also noted by the RBI.
  • It was widely expected, given the building inflationary pressures in the economy, that the RBI’s monetary policy committee (MPC) would change its stance to hawkish on June 6th while maintaining the status quo on the repo rate, waiting for more data on inflation and growth until its August meeting to make a decision on a rate increase in a data dependent manner rather than hike the rate preemptively to avert inflation which is not as yet showing up in the data. Instead, to the surprise of a majority of RBI observers, it has done the converse: it was hawkish by preemptively raising the repo rate and neutral on the stance despite its own inflation and growth forecasts for 2018-19 remaining nearly unchanged. Perhaps the MPC thought that the policy rate was not yet at neutral and was still accommodative as comments by MPC member Viral Acharya after April seemed to suggest. Also, the MPC appears to have given itself some flexibility on future monetary policy moves by maintaining a neutral stance while hiking the repo rate by 25 basis points – an attempt to stem the rupee decline in the context of the oil price, inflation pressures, current account deficit, loose fiscal policy, and possible US rate hikes by the Federal Reserve in 2018. Mostly, however, as the April meeting minutes revealed, where one MPC member dissented by seeking a 25 basis point rate hike in April itself, the June rate hike seems to be a compromise between the doves and the hawks on the MPC because of the unanimity of the decision now and has little to do with economic developments. The neutral stance, despite the rate increase, has encouraged the equity markets to rise after the decision was announced.

What to expect from the markets next week?

As was the case this week, the equity and commodity (including oil) markets are expected to trade in a range-bound manner though, to rise, they appear to be latching on to slivers of good news even in economic developments which normally put downward pressure on the markets as was evident with the SBI earnings report and the RBI decision. The rupee has stabilized after the softening of the oil price and is expected to remain stable.

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