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MOSL: Morning India (5/June/18): 1. EcoScope: RBI should maintain neutral stance for now; 2. CornerOffice (a. Cummins India; b Thermax); 3. NHPC

MOrning India (5/June/18): 1. EcoScope: RBI should maintain neutral stance for now; 2. CornerOffice (a. Cummins India; b Thermax); 3. NHPC: Shutdowns, weather impact FY18 performance

 

Today’s top research idea

EcoSCope: RBI should maintain neutral stance for now; Neither domestic nor global fundamentals support monetary tightening

We believe that RBI should maintain its neutral policy this week for five reasons:

• Notwithstanding higher oil prices, the average inflation forecast is sub-5% for FY19, with 4-4.5% in 4QFY19.
• Central banks across the developed world have turned more cautious in the past couple of months, with growth weakening in the Eurozone, the UK, Japan and China. The US Federal Reserve has also toned down its stance.
• With fiscal policy reaching limits in its ability to support economic activity, the monetary policy should avoid any tightening for now.
• Although INR has weakened ~5% in nominal terms in 2018, the current level is similar to the average in 2016 and INR against USD is still stronger in real terms.
• Higher growth in MSPs is still a valid fear, but not a certainty. It would be rational to wait and watch for the final MSP policy before acting on the risks.

The bond yield has shot up because of the fear of anticipated hikes and lack of demand. The RBI must maintain neutral stance to address the former and must conduct further open market operations (OMOs) to address the latter.

Piping hot news

US Fed must go slow with balance sheet unwind: Urjit Patel

• The US Federal Reserve must slow down the pace of trimming its balance sheet in order to avoid a crisis in the dollar bond market, RBI governor Urjit Patel said in an opinion piece in the Financial Times. “Given the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable,” Patel wrote in the piece published on Sunday.