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30 Nov 2015
INR: Outperformer, but a sharp decline in the Modi factor is a key risk – RBC CM
FXStreet (Delhi) – Research Team at RBC Capital Markets, expects INR to be one of the outperformers in the Asian region.
Key Quotes
“India is among the better positioned in Asia to benefit from lower oil prices and is also relatively insulated from China’s economic growth slowdown (from a trade perspective), with exports to China accounting for just ~5% of India’s total exports in 2014. We think the bigger issue for INR watchers is the progress of structural reforms.”
“Reforms on tax, labor, and land are all crucial if India is to attract FDI and remove key obstacles to doing business in India. All three reform bills have run into difficulty since August due to the BJP’s minority in the Upper House. RBI is doing its part to help, announcing a range of measures to liberalize financial markets. For example, it increased the US$30bn limit for foreign investment in government bonds by US$18bn (by March 2018 in stages; currently fully utilized and up to 5% of outstanding). In the meantime, the coming Pay Commission Report, where employee salaries are linked to performance, could help to lift domestic demand and productivity meaningfully.”
“The odds of further cuts in 2016 will be contingent on CPI inflation undershooting. The RBI mandate is to bring CPI inflation to 4% +/-2%pp by March 2018. The March 2017 target is set at 5%. Having frontloaded monetary policy with a 50bp rate cut to 6.75% on September 29, we expect the RBI to be on hold for the foreseeable future, but the risk is toward another 25bp cut.”
“The risk to our overweight INR view is that support for Modi’s BJP slips meaningfully. Key losses in Delhi and Bihar this year are concerning in this regard. The BJP will have to do very well in the state elections between now and through 2017 to maintain reform momentum (and sentiment).”
Key Quotes
“India is among the better positioned in Asia to benefit from lower oil prices and is also relatively insulated from China’s economic growth slowdown (from a trade perspective), with exports to China accounting for just ~5% of India’s total exports in 2014. We think the bigger issue for INR watchers is the progress of structural reforms.”
“Reforms on tax, labor, and land are all crucial if India is to attract FDI and remove key obstacles to doing business in India. All three reform bills have run into difficulty since August due to the BJP’s minority in the Upper House. RBI is doing its part to help, announcing a range of measures to liberalize financial markets. For example, it increased the US$30bn limit for foreign investment in government bonds by US$18bn (by March 2018 in stages; currently fully utilized and up to 5% of outstanding). In the meantime, the coming Pay Commission Report, where employee salaries are linked to performance, could help to lift domestic demand and productivity meaningfully.”
“The odds of further cuts in 2016 will be contingent on CPI inflation undershooting. The RBI mandate is to bring CPI inflation to 4% +/-2%pp by March 2018. The March 2017 target is set at 5%. Having frontloaded monetary policy with a 50bp rate cut to 6.75% on September 29, we expect the RBI to be on hold for the foreseeable future, but the risk is toward another 25bp cut.”
“The risk to our overweight INR view is that support for Modi’s BJP slips meaningfully. Key losses in Delhi and Bihar this year are concerning in this regard. The BJP will have to do very well in the state elections between now and through 2017 to maintain reform momentum (and sentiment).”