The Reserve Bank of India is likely to cut interest rate one more time before the end of this year, said Christopher Wood, long-term equity strategist at CLSA.
While Wednesday’s 25 basis-point-cut in the repo rate was no surprise, Woods said the central bank choosing to maintain its neutral stance was a mistake.
The shift to a neutral stance in the previous bi-monthly policy in June had confused the market at the time, he said. This mistake has been further compounded this week with the RBI maintaining its neutral stance, Wood said in his Fear & Greed report.
The high real interest rates was also largely responsible for the rupee's strong performance this year, Wood said.
More so, the rupee strengthened “despite obvious negatives such as the $15 billion farm loan waivers agreed by the four state governments so far this year,” he said.
The rupee appreciated 6.8 percent against the U.S. dollar in the first seven months of 2017.
On Indian Equities
Along with high real interest rates, India is also witnessing a range of record highs, primarily due to continuing inflow into the country’s equity mutual funds.
The benchmark S&P BSE Sensex has risen more than 21 percent in the current year while the NSE Nifty 50 breached the 10,000 mark in July.
If the Indian market corrects, it is likely to be due to global factors instead of domestic ones, said CLSA’s Indian strategist Mahesh Nandurkar, citing robust fund flows.
The long-awaited earnings rebound will occur towards the end of 2017 as the effects of demonetisation and the Goods and Services Tax rollout subside, the report said.
On The U.S. Dollar
While the obvious call on the currency would be a “retracement” as it tests its downside resistance, Wood said political uncertainty in the U.S. has kept the greenback lower.
The dollar is currently hovering near its lowest level in more than a year, driven by firming economies in Asia and Europe, dovish overtones from some Federal Reserve officials and lingering concerns about the Donald Trump administration.
That being said, Wood expects the currency is likely to break the barrier – upwards or downwards – in the month of August, he said. A deflationary rally led by another slump in oil prices (“certainly a possibility”) and the Federal Reserve beginning to trim its $4.5 trillion balance sheet will make the outcome more likely.
On the other hand, the Fed deciding to “U-turn” its monetary tightening path could trigger the U.S. dollar to fall below the current levels.
On Donald Trump
Wood partly blames the dollar’s weakness on the escalating chaos in the White House. Apart from the constant change in key positions in the Trump administration, his commentary around the tax and trade reforms have also led to worries. These worries, however, may be misplaced.
The reality is that the continuing self-destructive behavior of the 45th American president makes it ever harder to believe he can deliver real reform.Christopher Wood, Long-Term Equity Strategist, CLSA
While Trump's Presidential campaign was a success, his ability to run the executive arm of the government is lacking, Wood said.
“He clearly failed to get into the details of healthcare reform while most of his energies, when not watching cable TV, seem to be consumed by addressing the Russian probe. This resulted in the gratuitous attack on Attorney General Jeff Sessions last week which, like the sacking of former FBI director James Comey, GREED & fear views as an “own goal”.