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16
September 2016
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| Interest Rate (The Total Investment & Insurance Solutions) |
Inflation has bottomed out leaving the
Reserve Bank of India (RBI) with less room to undertake further rate cuts, says
India Ratings and Research (Ind-Ra). The ratings agency says it believes that
in such a scenario companies may lock in their long term funding at the current
rates, before the cycle turns.
"Though global factors particularly low
interest rates and fund inflows into emerging markets have remained favourable
for a fairly extended period of time, the likelihood of interest rates moving
up from here has strengthened - notwithstanding the fact that the US Federal
Reserve may still take some time to resume hiking rates. With the backdrop of
rising global yields, where global sovereign-bond yields have risen to the
highest in almost three months, the Indian currency may come under pressure and
push the RBI to turn hawkish," Ind-Ra says. The Total Investment & Insurance
Solutions
As per the ratings agency inflation appears
to have bottomed out, however inflationary expectations have once again shown
an up-tick. The Total Investment &
Insurance Solutions
The RBI carries out a quarterly survey of
about 5,000 households across 16 cities in India to assess inflationary
expectations of households three months ahead and one year ahead. As per data
released by the central bank, mean household inflationary expectations for
three months ahead in June 2016 rose by 110bp to 9.2% from the March 2016
survey. The one-year ahead mean inflation expectation is even higher at 9.6%
than the three-month ahead expectations, implying households expect the
inflation trajectory to move further up.
The Total Investment & Insurance Solutions
Ind-Ra says, "The shift in RBI's stance
with respect to liquidity to neutral from deficit mode has had a significant
impact on the yields of government securities (G-sec). Liquidity is no longer
in the deficit mode, in fact in the last two months there has been net
liquidity surplus in the system. The yield on the benchmark 10 year G-sec is
presently hovering around 7% as against 7.5% in April 2016. We believe that the
possibility for a further liquidity driven drop in the G-sec yield is limited.
However, due to negative yields prevailing globally, demand from foreign
participants can push yields down further."
According to the ratings agency, one of the
unstated objective of the outgoing RBI governor Raghuram Rajan was to maintain
real interest rates, the difference between risk free interest rate and
consumer price index (CPI), positive and in the range of 1.5% to 2%. The Total Investment & Insurance
Solutions
Ind-Ra says it expects the new RBI governor
Urjit Patel to also follow this approach. Real interest rate has remained
positive since January 2014. It peaked at 4.91% in November 2014 and has
declined since then to 2.06% in August 2016. "It may be noted that the period
when the real rate of interest was significantly in excess of 2% was also the
period when RBI cut the policy rates. As the real rate of interest fell close
to/lower than 2% from April 2016 onwards, RBI has maintained a status quo on
policy rates," it added. The Total
Investment & Insurance Solutions
Since the soft trend over the last three
years has significantly affected earnings and debt repayment capacity, the
ratings agency feels that corporate India will be keenly monitor the nominal
GDP growth rate. The Total Investment
& Insurance Solutions
In its previous report, Ind-Ra had
highlighted that the total refinancing required by the top 500 Corporates in
FY17 aggregates to Rs2.1 lakh crore, with potential candidates which will be
able to access the bond market being Rs70,000 crore. "While it is early to
signal a shift in the revenue trend line, corporates are likely to benefit from
the current refinancing opportunities at low rates and will possibly lock-in
long term funds since the downside to interest rates are limited or
negligible," the ratings agency concluded.The Total Investment & Insurance Solutions
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