The RBI Monetary Policy surprised the street by maintaining status quo on repo rates at 5.15%. The markets had almost factored in a rate cut of 25 bps. However, the RBI held on to its accommodative monetary stance, keeping the doors open for future rate cuts. The decision to refrain from another rate cut was driven by sharply higher food inflation and the narrowing real interest rates. The RBI also wanted some more time to check the traction on transmission of rate cuts. In addition, the government had taken a series of fiscal measures to boost growth and the impact was yet to be observed.
Brent crude oil prices got another boost on Thursday after OPEC and other members like Russia agreed on a template to cut supplies further. The OPEC+ has been currently cutting supply by 1.2 million bpd but has decided to increase the supply cut to 1.6 million bpd. This decision is likely to push the price of crude oil closer to the $70/bbl mark and could enable Saudi Aramco to get a much better valuation on listing. Apart from the supply cuts, the sharp drawdown in US inventories has also resulted in a sharp spike in oil prices. For now, the oil markets are not worrying too much about the US-China trade deal.
Forex reserves with the RBI crossed the $450 billion mark for the first time in its history. The rise has been quite sharp after the reserves had dipped below the crucial $400 billion mark after a series of RBI interventions last year. With falling imports and tepid oil prices, the current level of forex reserves gives almost a 12-month cover to imports, an extremely comfortable situation to be in. In the last few months, carry trade had kept the rupee in a position of strength and the RBI did not have to use up its resources to maintain rupee stability. Gold imports have also fallen sharply in the recent past.
In a sharp downgrade of growth, the RBI cut its full year growth estimates to just 5%. This is at par with recent full year growth estimates given by CRISIL and Goldman Sachs. The first half growth had been 4.75% and the RBI is now factoring in an average of 5.25% growth in GDP in the last two quarters, which looks a lot more pragmatic. The third quarter growth may already be in trouble with the growth in IIP and core sector dipping into negative territory in the last two months. It looks like a weak third quarter followed by a relatively stronger fourth quarter. RBI estimates do look like a plausible scenario.
Global rating agency, Moody’s, has downgraded the ratings of Yes Bank to negative outlook. Moody’s pointed out that stressed assets and other related issues would put pressure on the liquidity situation of the bank as also its fund capacity. The outlook is basically a reflection of further deterioration in its asset quality from current levels. The bank’s core capital is on the borderline at 8.7% and the future prospects of the bank could be endangered if the bank is not able to capitalize itself adequately on time. Yes Bank had made a statement that a number of lenders had expressed interest in taking a stake in the bank but not much progress has been made after that. Moody’s also sees significant risks to Yes Bank over the timing, pricing and the regulatory approvals required for this fund raising.
In one of the biggest fiscal boost packages, Japan has allocated $240 billion to boost the economy and push GDP by 1.4% in the next one year. The Japanese economy has been losing steam after the Olympics driven boom had ended. To give an economic boost, the Japanese government has already approved 50% of the funds with the balance 50% also coming in shortly. The boost is likely to be in the form of encouraging greater spending power among people, boosting investments, spending on public works, tax rebates to business etc. Japan has been struggling to consistently grow its economy.
