EUR 140.56 For Business Accounts Only

Breakfast Report - 21 November 2016

• This week, the MPC will have the opportunity to review its monetary policy stance for the final time this year and perhaps, set a marker for 2017 as well. The MPC is likely to consider three factors when making its decision – inflation, capital imports, and the FX market. There are two key messages from recent inflation data: The first is that y/y inflation is perilously high at 18.3% and the other is that month-on-month inflation declined for four consecutive months from a high of 2.75% in May to 0.80% in September. Whilst these two messages could give conflicting recommendations (the former – tighten, the latter – ease), we note that current inflation is cost driven, so addressing cost pressures remain the most effective way of tackling it. Meanwhile, capital imports in the third quarter exceeded total capital imports during the entire first half of the year as the new flexible exchange rate regime, as well as higher yields in the fixed income market, attracted improved foreign portfolio inflows. However, even considering recent modest inflows, the tactic of tightening monetary policy to attract inflows is hamstrung by the poverty of other necessary conditions, especially a stable and transparent FX market. FX policy currently stands as the bedrock of monetary policy as it remains the crucial variable for investors, businesses, and individuals alike. Tight monetary policy will only bear fruit with a robust FX market in support and absent this, the argument for keeping rates high becomes significantly weaker. Thus, even as we do not expect the MPC to deviate from its recent tight stance, we do not expect much success in achieving its objectives until clarity, transparency, and flexibility is restored to the FX market.
• Verdict: Hold
• The ASI opened to a six-month low, dropping below 26,000 points threshold as all key sectors closed in negative territory. The bourse dipped even further amidst a fresh rout across cement producers on Tuesday and as energy stocks, particularly FO tarried in the red. The NSE ASI closed 2.42% lower w/w.
• Although the market closed lower at the end of last week, we highlight the improving market breadth. We believe recent losses has thrown up bargains which could steer the ASI to a modest gain at week open as markets digest MPC decision and Q3’16 GDP data.