RBI policy, monsoon key triggers for markets this week

Liquidity in the coming week could be a constraint as the US Federal Reserve is on course to increase interest rates in its June meeting.

Liquidity in the coming week could be a constraint as the US Federal Reserve is on course to increase interest rates in its June meeting.

Mumbai: The markets are expected to stay volatile as the Reserve Bank of India’s (RBI) bi-monthly monetary policy review meeting and progress of monsoon will be in focus this week.

Liquidity in the coming week could be a constraint as the US Federal Reserve is on course to increase interest rates in its June meeting and may even indicate another rate hike to its forecast this year as US employment report in May was strong.

Back home, the RBI’s monetary policy committee (MPC) will meet from 4-6 June for the second bi-monthly monetary policy review for 2018-19, and the resolution of the MPC will be announced after 2.30pm on 6 June.

According to a Mint poll, RBI is likely to keep key policy rate unchanged, but may look at a hike in rates in August. Of the 15 economists surveyed by Mint, 11 expect RBI to keep the repo rate—the rate at which the central bank infuses liquidity in the banking system—unchanged at 6%. Only 4 economists expect a rate hike of 25 basis points.

“We assign a 40% probability that the MPC will pre-emptively hike rates by 25bps in the June policy meeting. We expect the tone of the policy statement to remain hawkish. The minutes of the April meeting suggest that two of the six MPC members have already decided to vote in favour of a 25bp hike,” said Tanvee Gupta Jain (economist) and Rohit Arora (strategist), UBS Securities India Pvt. Ltd in a note on 23 May.

Another factor that the markets will keenly watch out is the progress of monsoon. The Indian Meteorological Department (IMD), in its second stage forecast of South-West monsoon (June-September 2018), has retained its “normal monsoon” forecast.

Rainfall forecast has been kept unchanged at 97% of long period average (LPA). Temporally, rainfall is likely to be 101% in July and 94% in August, indicating good distribution for sowing and marginally below normal rainfall during harvesting. Geographically, both the critical regions—Central India and South Peninsula are expected to receive normal rainfall.

The third advance estimate for FY2018 crop production indicated a record production for foodgrains and pulses, according to Kotak Instituional Equities. “This will be positive for the rural sector, which can continue if monsoons support another year of good crop production. As a base case, the upside risks to food inflation are likely to remain muted in FY2019 if the monsoons (and consequently crop production) remain favourable and the government continues to be vigilant on any sharp price increases,” it said in a 30 May note.

Meanwhile, auto stocks are likely to be in focus after they reported sales data for May. According to Mint, India’s top five carmakers—Maruti Suzuki India Ltd, Hyundai Motor India Ltd, Mahindra and Mahindra Ltd, Tata Motors Ltd and Honda Cars India Ltd—collectively sold 243,856 units during the month, up 20.6% from 202,187 units a year ago.

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