With the Reserve Bank of India opting to keep the repo rate unchanged at 5.25% amid heightened geopolitical tensions and inflation concerns, the debate around the future trajectory of interest rates has intensified. While the central bank has retained its neutral stance, many market participants believe the window for further monetary easing may have narrowed considerably.
In this edition of ETMarkets Smart Talk, Sandeep Yadav, Head of Fixed Income at DSP Mutual Fund, shares his perspective on why the RBI's cautious approach is justified in the face of global uncertainties, why the rate-cut cycle may be nearing its end, and how persistent energy price shocks could impact India's macroeconomic outlook.
He also discusses the implications of recent FPI-related reforms, the likely impact of India's inclusion in global bond indices, and explains why such inclusion could attract over $25 billion in debt inflows over the next few quarters while offering only temporary support to the rupee. Edited excerpts:
Q) The RBI chose to keep the repo rate unchanged at 5.25% despite increasing global uncertainties. What factors do you think drove the MPC's decision to stay on hold, and do you think it was the right one?
A) It is precisely these uncertainties that led to the RBI not changing the rates. The West Asia war’s outcome and span is uncertain. In such a scenario, it is very challenging to balance between inflation & growth.
The RBI has, therefore, made a measured move in holding the policy rates and not rushing into hiking. Despite upward revision in CPI projections for FY27, the inflation is still projected to be within the RBI’s target band.
Further, the prices are currently driven more by supply shock and could turn transient if the truce prevails. In such a scenario, waiting for the second-order effects to show up and react to that data is a better choice rather than to hike & risk growth.
Q) The central bank retained its neutral stance even as inflation risks have risen. Does this indicate that the rate-cut cycle has effectively come to an end?
A) A neutral stance indicates that the RBI will be data-dependent. While inflation has certainly risen, the truce in Iran could give respite.
Even so, with a 50 bps upward revision in CPI forecast and REPO at 5.25%, further rate cut does seem unlikely for the foreseeable future.
Q) The policy statement repeatedly highlights elevated energy prices as a key risk. At what crude oil price level does India's macroeconomic outlook become meaningfully vulnerable?
A) Duration of the higher prices is far more pertinent for India’s macroeconomic strength than a particular price level. For instance, sustained prices at USD 100 for the rest of the year can have a greater impact than a brief period of USD 120 or higher. If the West Asia war continues till the end of this calendar year, the risks to the economy will be lasting in our view.
Q) RBI has removed the short-term investment limit, security-wise limit, and concentration limit for FPIs investing in government securities under the General Route. How significant is this reform in attracting foreign capital into Indian debt markets?
The existing limits for short-term investments or non-FAR securities are already underutilised, and so further easing cannot make any significant change.
Q) What impact could this move have on government bond yields, particularly at the longer end of the curve?
A) The impact is not expected to be meaningful. The non-FAR security limits were already available if an FPI wanted to invest in longer bonds. Availability of FAR was never a limiting factor.
Q) Do you expect foreign investors to increase allocations to Indian debt immediately, or will global macro conditions continue to be the deciding factor?
Q) Could increased FPI participation in government securities provide structural support to the rupee?
Structural support for the rupee has to come from structural changes, primarily by addressing the current account deficit.
Q) What kind of debt inflows could India attract over the next 12–24 months as a result of these changes?
A) Apart from the FCNR flows, the inclusion of Indian securities in global Bloomberg, JP Morgan and FTSE indices can lead to at least USD 25 billion of flows, possibly even more, depending upon which indices Indian securities are included in. However, these flows should materialise from the next fiscal year, as the inclusion process takes time.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
