Dr. Patel’s appointment should bring cheer for markets as there won’t be major disruption in the RBI policies. He would strive to have a stable currency and a well managed inflationary environment as the current outgoing Governor has been doing. In the current scenario of ongoing structural reforms, we expect equity markets to be positive or at the most sideways till some further trigger. Since Dr. Patel has not spoken much on the NPA issue, markets will want to hear more from him on that front.
Bond markets shall see some initial sell off on the opening and till the next policy meet it should trade in the range of 7.15-7.20%. This sell off is mostly because markets has been expecting a more dovish Governor. Further sell off in bonds is not in the making as we expect liquidity to be comfortable even if the FCNR (B) deposits near maturity as it has been continuously reiterated by Dr. Rajan that central bank is fully covered on the FX front. There should be some value buying opportunities when the yields fall.
Monetary Policy committee (MPC) which is in the making will decide the monetary policy by consensus and not just lay the powers with the Governor, who can use veto power only in case of a tie. This will bring objectivity and transparency in the way rate path is decided. So Dr. Patel’s appointment will not only be linked to monetary policy reading but cover other areas like FX, NPA management and financial market development etc.
We expect the monetary policy stance to be accommodative and a scope for rate cut in Q3 FY2017 if the inflation meets the average target of RBI, which is 5.00% by March 2017.