The Federal Reserve chairperson Janet Yellen, however, suggested it would not keep monetary policy on hold until inflation reaches 2%, implying a December rate hike was nearly a done deal.
A seeming thaw in geopolitical tensions helped push market volatility lower amid flat equity markets and slightly firmer bond yields on the back of hawkish undertones from the US Federal Reserve officials. Indian bond markets continued to remain weak amid firming yields as the RBI meets later this week to give its assessment of monetary stance and rates.
Global equities advanced as US President Donald Trump's tax reforms got a boost and the new structure assumes a template that would mean a simpler tax system.
Further, the Bureau of Economic Analysis estimates showed the US economy growing at relatively faster pace against what was assumed. With corporate earnings still lower and the impact of hurricanes likely to damage the performance data, it remains to be seen if this growth is sustainable.
The Federal Reserve chairperson Janet Yellen, however, suggested it would not keep monetary policy on hold until inflation reaches 2%, implying a December rate hike was nearly a done deal. In other developments, German Chancellor Angela Merkel's unconvincing electoral win and snap poll announcements in Japan would have some implication on currency market sentiments. The dollar recovered its multi-quarter weakness as an upward revision in the second quarter GDP and the higher probability of a rate hike in December gets priced in. Peoples Bank of China, the central bank of China, relaxed reserve requirements for banks, which should be seen as a pro-growth initiative and could have influence other Asian central banks in their economic assessments.
The key event, however, is the Reserve Bank of India's Monetary Policy Committee meeting this week. No change is expected in any of the key rates. However, last October in a similar backdrop there was a surprise 25 basis rate cut. The risks to inflation and RBI's assessment may also partly stem from the US Federal Reserve's course of action, which appears to be more likely of a pre-emptively hiking in December when there is no great evidence of inflationary pressures. If one were to glean from the various analysis in local press and media posts, the news release of a likely fiscal stimulus soon – a Rs 50,000 crore stimulus to buttress the already budgeted Rs 21.5 lakh crore of expenditure budget – should not be of great immediate impact.
On the contrary, it could possibly lead to an optical fiscal slippage and lead to questioning the credibility of the new resolve to be fiscally disciplined. It would, therefore, be fair to assume a monetary stimulus (either in the form a rate cut or move to a durably positive rather than neutral liquidity stance) to be more suitable in the current backdrop.
With an expected auction calendar and an announcement of yet another open market operations sale by Reserve Bank of India, bond yields will dab the upper end of 6.60-6.75 range in the coming days. Will still consider value buying upwards of 6.70% given that the overnight rates are at 6% and liquidity likely to remain positive for many weeks ahead.
RBI rate cut ahead?
No change is expected in the Reserve Bank of India's Monetary Policy Committee meeting this week
The risks to inflation and RBI's assessment may also partly stem from the US Federal Reserve's plan ot hike rates in December
However, last October in a similar backdrop there was a surprise 25 basis rate cut.
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