Ind-Ra: RBI's Policy to Set Tone for Markets

The debt and currency markets are focussing on the Reserve Bank of India's (RBI) policy action, as well was the economic assessment coming up this week. India Ratings and Research (Ind-Ra) expects the 10-year G-sec yield to trade at 6.12%-6.35% (6.24% at close on 2 December 2016) through the week. The rupee is likely to trade at 67.75/USD-68.75/USD (68.23/USD at close on 2 December 2016).

Mixed Cues Pose Challenges for Policy Review: Ind-Ra believes, RBI will hold interest rates, with an accommodative stance continuing, amid the uncertain global environment. Markets are however pricing in a rate reduction and an accommodative stance by the RBI.

Bond Markets Pricing in Easing of Rates: In Ind-Ra's assessment, the bond market is factoring in a rate action by RBI, due to low inflation data and expectation of a further strengthen in deflationary forces. While Ind-Ra believes that a status quo policy will lead to realignment between market expectations and RBI's outlook. Additionally, weak global cues - uptick in crude oil prices, surge in global bond yields adds to the caution in the bond market environment. Ind-Ra, therefore, believes the bond markets could undergo some correction hereon, in the event that the RBI maintains a status quo on rates. That could also open up the possibility of widening of corporate bond spreads.

Global Developments Pose Headwinds to Rupee: The rupee will take cues from RBI's monetary policy - as may lead to erosion in risk appetite. Following the outcome of the Italy referendum, consequent financial and political instability is likely to keep investors preference strong for dollar assets. Additionally, there is a near consensus among market participants of a rate hike in the next week's US Fed policy review. The gains in the rupee, therefore, will be limited and reined in by the evolving risk preference.

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