Global: Bank of England responded to contain the damage in wake of Brexit by cutting the rates by 25 bps to 0.25% – the first rate cut in over 7 years – and highlighted its preparedness for any eventuality. Government bond Quantitative Easing (QE) was raised to GBP 435 bn from GBP 375 bn earlier and announced corporate bond QE of GBP 10 bn along with a new term funding scheme (GBP 100 bn at close to base rates). This was an indication that liquidity spigots still remain intact even after Bank of Japan (BoJ) disappointed last week with a status quo, defying expectations of more QE.
Domestic: It was a landmark week with the RajyaSabha passing the GST (Constitutional Amendment) Bill, paving the way for implementation of the most significant tax reform in India. Markets heaved a sigh of relief, as GST has been in the making for a decade now. However, meeting the deadline of April 1, 2017 for GST implementation will be challenging given the spate of legislative and operational issues.
The focus will now be on the last monetary policy meeting to be presided over by the RBI governor RaghuramRajan. We believe the policy review may not be really eventful from a rate action perspective – we do not expect a rate cut – but it will be a momentous one, as the outgoing governor may sound out on inflation trajectory, resolution of bad assets, macro stability and systemic issues. Bond markets have started factoring in the possibility of a dovish RBI governor, but at the moment the award of the Seventh Pay Commission and the impact of monsoon (rains 2% above normal so far and sowing higher ~6% YoY) will be important variables which need to be assessed before the RBI acts any further.