After breaching the 8% mark decisively in October, the 10-year benchmark yields in the Indian markets are back to 7.224%, the lowest level of yields since April 2018. The sharp fall in yields was driven by a sharp fall in Brent Crude prices and also the RBI announcement of a higher OMO of Rs.50,000 crore per month. Crude oil prices have fallen to a 16-month low as concerns over global GDP growth are threatening to weaken the demand for crude oil. It is also expected that the Fed may hold rates tonight and that could mean further weakening of the US dollar and strengthening of the INR.
Aircraft giant, Boeing, has pointed out that Indian airfares are at least 15% below the standard breakeven levels, making the sustenance of business largely unviable. Indian aviation companies have been under tremendous pressure as the spread between the Revenue per average seat kilometre (RASK) and the cost per average seat kilometre (CASK) has gradually narrowed and has now turned negative for the industry as a whole. The competitive pricing worked as long as crude prices were low but with the recent spike in crude, that advantage has gone. ATF prices are yet to come down with crude prices.
Some of the leading banks that are currently under prompt corrective action (PCA) may be allowed to exit the framework. These banks that could come out of the PCA include Allahabad Bank, Bank of India, Bank of Maharashtra and Corporation Bank. The moment a bank is out of PCA it can resume normal lending operations. Dena Bank is anyways likely to get out of PCA due to its proposed merger with Vijaya Bank and BOB. Greater leniency towards PCA banks was one of the dispute areas between the Finance Ministry and the RBI, which eventually led to the resignation of Dr. Urjit Patel.
Fed is expected to hike rates by 25 basis points on 19th December marking the fourth rate hike during the year. But the market expectation is also that the Fed may make dovish noises after that and maintain its guidance of lower target rates next year. The rate hike, if done on Wednesday, will take the rate to a range of 2.25% to 2.50%. Trump has been putting pressure on the Fed to maintain a more easy money policy and keep rates low to assist growth. If the Fed gives a dovish trajectory for next year then US equities could rebound although the dollar and bond yields may head lower.
The Monetary Policy Committee (MPC) minutes were published on 19th December outlining the detailed minutes of the 5th December meet. The undertone was clearly cautious due to volatility of interest rates. While the MPC had maintained status quo on rates, the stance of the policy was maintained as calibrated tightening rather than neutral. The MPC has acknowledged that inflation has surprised on the downside but is also cautious due to the impact of higher fiscal deficit due to farm loan waivers and a higher CAD if the global trade revives at a faster pace. The MPC was also sceptical if the negative food inflation would sustain for much longer as the base effect was likely to wear away gradually. MPC also felt that the impact of higher MPC was still a major inflation risk.
With the Congress taking the initiative of waiving off loans in Rajasthan, MP and Chhattisgarh, the BJP government finds itself in the back foot. State governments of Gujarat and Assam were quick to announce similar relief schemes including waiver of electricity bills for rural households. But the bigger worry is the impact on state finances. The state fiscal deficit has shot up in the last few quarters from 2.5% to over 4%. That puts the total combined fiscal deficit of the centre and states at well over 7%. Economists feel that fiscal profligacy could be harmful for state finances and also for external ratings.
