Accommodative stance, lower credit costs may boost equity market: Emkay

The likelihood of the RBI going in for another 50bps points rate cut for the rest of the calendar year is very high, says Dr Joseph Thomas, head of research, Emkay Wealth Management

There is a significant acceleration in monetary policy action towards supporting economic growth after taking sufficient cognizance of the evolving tariff related issues. There are three clear indications in the policy from which we may infer the “intended direction “of the central bank policy.

 

The first is that, as widely expected, the RBI has cut the repo rate by 25 basis points. The second, is the change in the stance from ‘Neutral’ to ‘Accommodative.’ The Accommodative stance represents soft money policy, and it also implies further rate cuts in the coming months to facilitate the economy moving to a lower cost of credit. 

 

 

The likelihood of the RBI going in for another 50bps points rate cut for the rest of the calendar year is very high. The third and more significant aspect is the pro-active liquidity management that the central bank has undertaken in the last three months to smoothen the money market conditions.

 

The interbank market is currently in a surplus of close to ₹1.50 trillion. Lower rates and liquidity that is aplenty are the solid launch pads from which the market could launch itself to much higher levels. 

 

While the growth rate has been pruned to 6.50 per cent for the whole year, against the background of slower global growth as also a fast-declining US growth. The inflation level is placed at 4 per cent, and for most part of the year the level of inflation is likely to be sub-4 per cent. The policy document speaks about the “durable alignment “of the actual inflation levels to the estimates, which adds to the comfort of the RBI.  

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The forecast of normal monsoon, good harvest of crops, lower commodity prices etc. will all conspire to keep inflation lower in the coming months.  

 

The immediate impact of the new tariff regime is that in the short run, it will be disinflationary for India. The overwhelming positive impact of lower commodity prices, especially oil prices will be the best thing to happen for the economy. This makes it all the more easy for the central bank to bring down the rates and make credit cheaper.  

 

In the ultimate analysis, the impact of the tariffs may be a bit overstated at present though the fact is that as against an economy close to the size of $4 trillion, barely $80 billion is the exports that may be impacted to some extent. 

 

Therefore, the arithmetic is about something that is a shade lower than 1 per cent of the GDP. As far as India is concerned there has been several rounds of bilateral discussions which have been going on to iron out a mutually agreeable tariff regime, and once these efforts reach fruition the tariff related dust will settle down earlier than expected.

 

The ten-year benchmark yield technically targets 6.35 per cent in the post policy move, and it has the potential to move towards 6.18 per cent, thereafter. Portfolio positioning to take advantage of the favourable movements borders on cautiously riding the wave till the target rate. The soft money policy will benefit the equity markets like never before with strong banking and corporate balance sheets, and also with a huge public capex provision coupled with the government taking away much lower resources from the market.                 

 

(Disclaimer: Dr Joseph Thomas is head of research at Emkay Wealth Management. Views expressed are his own.)