Market focus on Eurogroup meeting, India under radar

Forex News and Events

Euro zone finance ministers meet in Riga

The hot topic this morning is the meeting between Euro zone finance ministers and Greece in Riga, during which Greece should present a package reforms that would help access more funding from the European Institutions. Greece government 5-year yields have rallied above 20% illustrating the market’s impatience with Greece. The rise of Spanish and Italian rates last week set the stage for a contagion into the European bond markets. However, the pressure weakened during the week as the Spanish 5-year returned below 0.60% at 0.58% while its Spanish counterpart stabilised at 0.56%. On the negotiation side, the situation didn’t improve much lately as the Tsipras’ government tries not to break its election promises, while European institutions are not ready to bow down as well. However, we do not expect much from today’s meeting as several finance ministers already lowered their expectations for a positive outcome. We will find out today if the Greek government is willing to agree on a “mutual beneficial” deal with the Institutions.

Is India the new China?

As discussed previously (see Weekly Report from last week), China's economy is growing at a slower pace, 7%y/y during the first quarter, as the second-biggest economy is facing major challenges like overcapacity of the economy, debt burden or the reorganization of its economy toward slower but sustainable growth. Investors are therefore wondering where to find some above-average long-term growth opportunities. The answer may be India. The Indian economy grew 7.5%y/y (according to the new Market-Price Calculation) during Q4 2014 while China's GDP came in at 7.3%y/y. Regarding Q1 2015, Chinese economy grew 7% while the Indian one is expected to have expanded by 7.4%.

Nevertheless, India must also deal with its own challenges to pave the way toward a solid, long-term growth. In February the government announced its intention to implement major structural reforms to put the country back on track. The package proposed by the government aimed to rationalize a capricious tax system feared by many foreign investors, to prioritize investments in infrastructure or to declare war on tax evasion. Despite these welcomed news, the government has to move from words to actions. As a good start, the government and the RBI reached a historical agreement by introducing inflation targeting monetary policy, aiming first to bring inflation below 6% by January 2016, then to set the target to 4% with a tolerance band of +/-2%.

Raghuram Rajan, the Reserve Bank of India governor, already lowered twice its policy interest rate (repo rate) by 25bps down to 7.5% during two unscheduled meetings (February and March). The governor is taking advantage of low inflationary pressure (5.11%y/y in January, 5.19% in February and 5.17% in March) and still has room to lower rates further. Mr. Rajan didn't cut rate on April 7, waiting on banks to transmit those rates cuts to the real economy as the base rate is still at 10%y/y. However, India has to take into account monetary policy of other countries as currency war rages across the globe. The Fed will certainly postpone the first rate hike later this year, we expect the RBA to cut rates in May while China just cut its RRR to 18.5% and is ready to ease further its monetary policy. We believe that the RBI is prone to cut rates as it wrote in its First Bi-monthly Monetary Policy Statement (released on April 7): 'Going forward, the accommodative stance of monetary policy will be maintained, but monetary policy action will be conditioned by incoming data'.

We therefore think that the RBI still has room to act and we expect the central bank to lower its repo rate by at least 25bps to 7.25% in its next policy meeting on June 2. However, the RBI may trigger a rate cut during an unscheduled meeting if inflation remains subdued.