Reforms will continue to be calibrated at a pace that takes everyone along, especially after the Bihar poll result, although this may disappoint some segments of the markets. It will not be easy for the Modi government to push for, say, GST Bill, in the winter session of Parliament.
In our view, the market has been excessively focused on ‘reforms’.
It is lending rate cuts that hold the key to cyclical recovery. It is for this reason we expect the RBI to cut 25bp in February after CPI inflation meets its ‘under-6%’ January 2016 target. Banks should cut 50bp in the April – September 2016 slack season if the RBI supplies sufficient permanent liquidity (US$2bn so far vs US$35bn needed in FY16).
This begs the question, don’t reforms matter? Yes, of course, they do, but they push up growth in 5-10 years.
RBI to hold Rs65/USD; end-2016 event risks We continue to expect the RBI to hold Rs65/USD as seasonality turns in favor of the INR into March. At the same time, the INR could see pressure tomorrow if equities sell off on the Bihar poll result. That said, capital flows will now face multiple uncertainties in late-2016: • RBI Gov Rajan’s term ends September 5, 2016; • US$26bn of FCNRB deposits mature around that time; 50% could be withdrawn;
• Significant FX redemptions as well (Chart 2);
• UP and Punjab polls in early 2017.
3 event risks: Bihar done; Fed, Earnings recovery to go We have been advising investors to focus on our 3 event risks. The first, Bihar, is done.
Looking ahead:
1. Fed rate hike: Our US economists continue to expect their first hike on December 16, especially after yesterday’s strong payrolls report (see, Fedexodus 6 November 2015). 2. Earnings recovery: January will likely be the litmus test of recovery in December earnings. Our equity strategists expect Sensex stocks to report an anemic 2% for the September quarter. They also see FY16 earnings growth cut to 8-10% from 16%
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