Investors looking to enter the market at current levels of the Sensex at 17000 and the Nifty at 5100 should not be worried about what RBI does on the 16th of September. Investors should focus on the longer term and in the longer term the belief is that the current policies of the RBI will bring down inflation, which is trending at 9.3% levels at present and if inflation comes down interest rates will also fall. The policy review on the 16th of September will not change that view.
The RBI mid term policy review scheduled for the 16th of September has become a crucial date. Equity and bond markets are waiting nervously for the policy moves if any by the RBI. There are expectations that the RBI will hike the repo rate by 25bps to take the total hikes in four months to 150bps. However, market sentiments are not dramatically going to be altered by what RBI does in the policy review. If there is going to be a rally in equity markets, it will continue whether RBI hikes rates or not. If there is going to be a rally in bond markets, the rally will continue whether RBI hikes rates or not. In short the policy review itself will be a non-event for the markets, though market players may believe otherwise.
Investors should look at the movement in bond yields and interest rates swap yields for cues on RBI policy. Ten year benchmark government bond yields have come off by around 15bps since the last policy review on the 26th of July 2011. The five year interest rate swap yield has come off by 85bps since the July review. The benchmark ten year bond 7.80% 2021 bond is trading at yields of 8.30% down 15bps from levels of 8.45% seen in end July while the five year OIS (Overnight Index Swap) yield is trading at levels of 6.85% down 85bps from levels of 7.70% seen end July. Bond yields have not fallen as dramatically as swap yields but the fact is that interest rate markets are looking at a scenario where the RBI will put a hold on policy rates either from the policy review in September or from the policy review in October.
The mid term policy review is not a regular policy review where the RBI meets bankers and addresses the media and analysts. It is just a short document on the policy angle of the RBI. One cannot expect economic factors to change dramatically in a month and half since the last policy review held in July 2011. In this review, the large shifts in market sentiments will weigh on RBI’s mind. The sharp falls in equity markets in August with equity indices across the globe falling anywhere between 5% (China) and 20% (Germany). Bond yields in the US and Germany has fallen to record lows. The fall in equity markets and bond yields reflect a sharper than expected weakness in global growth. RBI is therefore more likely to maintain rates status quo than hike rates in the current context of weakening global economic growth outlook.