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INDIA: The RBI Versus the Market.

INDIA
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  •  At a time when global growth is challenged, many Indian economists are questioning the Reserve Bank of India’s steadfast commitment to it’s 7.2% GDP growth forecast for the year ending March 2025.
  • With data showing that recent economic activity is moderating (industrial production and PMI’s have come off their highs), the RBI’s forecast now is unusual in that the Central Bank’s forecast is higher than the government’s.
  • The RBI maintains the view that rural spending is set to rise following a good monsoon season for rain.
  • Economists point out that exports are off their peak and that demand in urban areas has weakened.   
  • This is likely helping drive the sell-side view of RBI rate cuts. Using BBG’s MIPR function, we can see that the market implied rate in six months’ time is 6.15% for monetary policy; a reduction in the base rate of 35bps from the current base rate of 6.50%.
  • In the yield space, having touched 6.618% in early October, India’s  IGB 2-year has tracked global yields higher and is now 12.5bps higher at 6.743%.
  • Similarly, India’s IGB 10-year touched yield lows of 6.718% in late September and is now 15bps higher at 6.866%.
  • Whilst the move in Indian yields has been impacted by the move in US yields higher, India yield correlation to the US moves are quite transitory and at times are lowly correlated.   With 35bps of cuts priced in and a bullish RBI, it seems likely that the next move will likely depend on which one of these two are correct. 
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  •  At a time when global growth is challenged, many Indian economists are questioning the Reserve Bank of India’s steadfast commitment to it’s 7.2% GDP growth forecast for the year ending March 2025.
  • With data showing that recent economic activity is moderating (industrial production and PMI’s have come off their highs), the RBI’s forecast now is unusual in that the Central Bank’s forecast is higher than the government’s.
  • The RBI maintains the view that rural spending is set to rise following a good monsoon season for rain.
  • Economists point out that exports are off their peak and that demand in urban areas has weakened.   
  • This is likely helping drive the sell-side view of RBI rate cuts. Using BBG’s MIPR function, we can see that the market implied rate in six months’ time is 6.15% for monetary policy; a reduction in the base rate of 35bps from the current base rate of 6.50%.
  • In the yield space, having touched 6.618% in early October, India’s  IGB 2-year has tracked global yields higher and is now 12.5bps higher at 6.743%.
  • Similarly, India’s IGB 10-year touched yield lows of 6.718% in late September and is now 15bps higher at 6.866%.
  • Whilst the move in Indian yields has been impacted by the move in US yields higher, India yield correlation to the US moves are quite transitory and at times are lowly correlated.   With 35bps of cuts priced in and a bullish RBI, it seems likely that the next move will likely depend on which one of these two are correct.