We need to keep in mind that there is a confluence of factors and developments, both external and domestic resulting in sharp rise in bond yields.
The firming of yields abroad because of the changes in the stance of systemic central banks, especially the US Fed, and other fiscal developments in the US has been significant.
Over the last six months, domestic inflation has increased, partly on firming of food prices.
Because of the uptick in economic growth on the domestic front, there are now competing demands for financial capital, which puts upward pressure on all returns.
On the fiscal side we have news of fiscal slippages at three levels in recent times - fiscal slippage this year, fiscal slippage next year compared to what the market expected and what the target was, and then a postponement of the medium-term adjustment even further.
The movement in capacity utilisation and improved credit offtake are likely to result in an investment-GDP ratio that may go up.
The taxation on capital in India is from several sources - corporate tax rate, dividend distribution tax rate, for dividend income above Rs 10 lakh there is marginal tax rate, securities transaction tax and capital gains tax. So, there are five taxes on capital that would obviously also have an impact on investment and savings decisions
We look at inflation projections longer than what is happening in this quarter. Half of this quarter is already gone and that (inflation) rate includes 35 basis points of HRA.
Inflation rates are expected to be still around 4.5% for FY18-FY19 adjusting for HRA with upside risks in some quarters.
We felt that at this stage without more data coming in, it was not necessary to change the repo rate or the policy stance.
Even as the fiscal deficit has stayed above 3%, inflation has come down to some extent because the fiscal stance starting from 2014 has actually been on a downward trajectory.
The monetary policy itself has become much more flexible in terms of responding to inflation risks. So, it is not necessary that a 3% should be achievable by the time the report (Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework) said (the report was written in 2014).
However, having a fiscal stance that is conducive to achieving the 4% inflation target is important and significant deviation from this would make matters more challenging, going forward.
We are still waiting for some of the specifics on minimum support price in terms of costing it. And, in the coming weeks, as more information comes through on exactly which crops are going to be supported to what extent, we would have a better idea on the impact of MSP on inflation.
India
NRI
