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Essence of the Week
Jun 06, 2016 | Source: AxisDirect
The Met Department (IMD) in its second long-range estimate for monsoon this year forecast zero possibility of a deficient monsoon and a better spatial and temporal distribution of rainfall this time around. It also reiterated its forecast of above-normal monsoon of 106% of its long period average, bringing some more cheer to the market. The market has been eyeing the possibility of normal monsoon and Seventh Pay Commission dole-outs to spur consumption this year. Since IMD’s first forecast in April, the Sensex has jumped 7% whereas consumption-linked indices BSE Auto Index and BSE FMCG Index have risen 9% and 7%, respectively, even as the pay commission’s goodies are still awaited.
With the latest monsoon forecast and earnings season behind, the market will now eye the upcomingbi-monthly monetary policy review on June 7 for cues from the central bank (RBI). We believe the RBI will opt for status quo while reiterating its accommodative stance in policy.
There are a few factors which would warrant caution from RBI:
A sharp rebound in crude oil price, currently hovering around $50/bbl mark (up a staggering ~ 87% from its January 20 low and up 30% since RBI’s April monetary policy review)
Rising odds of a mid-year hike by the US Federal Reserve (either its June or July meeting)and the resultant strength in US dollar
Higher CPI and core CPI prints (at 5.39% and 4.9% respectively in April) would make RBI a little more circumspect
More importantly, RBI may want to look at the actual spatial and temporal distribution of rainfall before going in for yet another rate cut
It may also want to see further evidence of transmission of its cumulative rate cut of 150 bps by the banking system especially in the backdrop of new base rate guidelines and its latest liquidity management moves enunciated in the last policy
Hence, where we do not expect a policy rate cut, we would watch out for RBI’s take on liquidity management, rate transmission and evolving growth-inflation mix in the near term.
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