Mahendra Jajoo, CIO, Fixed Income, Mirae Asset MF
“RBI hiked repo rate by 25 bps to 6.5%, as was the market consensus. While there is marginal reduction in the near-term inflation projection, FY24 inflation estimate still remains well above 5%. Thus, the guidance continues to be one of continued vigil and caution. A marginal upgrade in growth forecast bodes well on the economy front.
While the uncertainties remain, incoming data suggests further moderation in inflation in coming months. As such, the Market expects policy rates to be on pause from next policy onwards.
While the 10-year government bond yields ticked up by 3-4 bps as an immediate reaction, they are expected to largely remain range bound in the current band of 7.20-7.40 for the time being. Short term rates are likely to move higher in line with adjustment in policy rates.”
Deepak Agrawal, CIO – Debt, Kotak Mahindra Asset Management Company
“RBI hiked rates by 25 bps in line with expectation by 4: 2 vote in favor of hike. Core Inflation and Financial Stability concerns led to “withdrawal of accommodation” stance being maintained as against market consensus. Based on RBI forward looking FY 24 inflation forecast of 5.30%, at 6.5% repo rate, the real rate is 1.25%. We believe this is the last rate hike in this cycle.”
Sandeep Bagla, CEO, TRUST Mutual Fund
A 25 bps hike in repo rate by RBI was baked in bond yields. 2 out of 6 MPC members voted for no rate hike. Market is a tad disappointed as there was no change in stance from “withdrawal of accommodation” to neutral. CPI Inflation is projected for FY24 at 5.3%. Market forecasters are expecting inflation to trend lower from RBI projections. The policy remains focussed on fighting inflation and should be welcomed by markets.
Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund
“The policy action and guidance are along expected lines as the rapidly evolving external dynamics and the still elevated core inflation was expected to constrain any possibility of a specific forward guidance. Having said that we expect that this hike would be the last in this cycle, with incremental actions to modulate excess liquidity. The lag effect of earlier actions and the cumulative monetary and liquidity tightening should enable policy rates to stay on hold incrementally. The FY24 GDP estimates which are in alignment with the Budget numbers probably remain on the higher side that could be re-assessed as we move forward.”
Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund
“RBI hiked the repo rates by 25 basis points and retained its stance on withdrawal of accommodation to control inflation expectations. The repo rate now stands at 6.5 % with MSF at 6.75 and SDF rates at 6.25 %. GDP growth for the current year has been hiked to 7 % and next year GDP is projected at 6.4% levels with first Q1- 7.8 %, Q2- 6.2 %, Q3- 6 % and Q4- 5.8 %. . CPI inflation for the current year has been reduced to 6.5 % from 6.7 %. Next year CPI inflation assuming normal monsoons is projected at 5.3 %, with Q1 – 5%, Q2- 5.4 %, Q3- 5.4 % and Q4- 5.6 %. RBI has increased its growth forecast for the next year due to increase in urban consumption, recovery in rural demand and investment activity gaining traction. RBI has assumed Crude oil prices at 95 dollars per barrel due to relaxation of covid restrictions and IMF projecting world growth to be at 2.9 % as advanced economies are expected to have mild recession only .
The policy was broadly on expected lines, but some sections of the markets expected a change in stance to neutral. The US Federal Reserve is expected to raise fed fund rates by 50 basis points and has given no indication of pause in rates, RBI has taken a cautious stance of maintaining withdrawal of accommodation. The hike in repo rates would lead to higher savings in the economy and reduce discretionary spending including demand for loans as repo rates hike get transmitted into the domestic economy. This should support investment activity and lower the current account deficit in coming months. By hiking rates and not committing on pause in rates , RBI is indicating its commitment to bring CPI inflation to 4 % band. Given the projection of CPI inflation remaining above 5 % levels in next year, the chance of rate cuts looks remote. The ten-year G sec is expected to trade in the band of 7.25 % -7.50 % in the coming months as the borrowing programme is expected to exert pressure on the long end of the yield curve.”
Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund
“The MPC hiked policy rates by 25 bps on expected lines with a 4-2 majority while keeping the monetary policy stance unchanged at “withdrawal of accommodation.” The 25 bps hike was on expected lines though the market was slightly disappointed with no change in the stance as some sections of the market were expecting the stance to change to “Neutral”. The MPC and the RBI Governor’s statement expressed concern on sticky “Core Inflation.” In our view, apart from the domestic inflation trajectory, RBI actions will continue to be influenced by the actions of Global Central banks, especially the US Fed. Going ahead, Indian Bond markets will be keenly watching the evolution of RBI’s management of domestic liquidity. We would recommend investors should increase their investments in Short Duration products, while selectively looking at Dynamic Bond Fund category as per their risk appetite.”
R. Sivakumar, Head – Fixed Income, Axis Mutual Fund
“The current yield curve presents material opportunities for investors in the short to medium term space. For investors with medium term investment horizon (3 Years+), incremental allocations to duration may offer significant risk reward opportunities. For investors with short term investment horizons (6 months – 2 years) money market strategies continue to remain attractive offering competitive ‘carry’ and low volatility.
The policy also caps of a busy week for debt market participants, as it digests, the budget, the US Fed action, and other central bank actions. Going forward markets should operate with normalcy as no news is often good news in terms of market action.
On inflation, we believe the RBI remains focused on bringing down inflation and even remains cautious of markets getting over-optimistic. While our call for lower inflation for the next year stands, our call to action on portfolios will be driven by high frequency data and the actual inflation prints as they are released.
Growth may trend slightly below RBI projections due to lingering pressures from the base effect and external factors, but we remain constructive from medium term perspective. Overall the Indian economy is backed by resilient domestic spending & government capex. While we believe, we are at the peak of policy rates, inflation and the US Fed action can be wildcards for market participants.”
Pankaj Pathak. Fund Manager- Fixed Income, Quantum Asset Management Company
The policy was broadly in line with the market expectations though we were expecting a pause in the rate hiking cycle this time. The RBI seems concerned about the sticky core Inflation while they are relatively more comfortable with the growth outlook.
In the last 10 months, the repo rate has been hiked by cumulative 250 basis points and the short-term money market rates have moved up by over 300 basis points. The full impact of these measures is yet to be seen. Additionally, the government has reduced the budget allocation for many of the welfare schemes along with the rural employment and farm income guarantee schemes. These measures are also disinflationary in the near term.
Based on the RBI 1 year ahead inflation estimate of 5.6%, the real repo rate is currently at 90 basis points and the real rate on a 1-year treasury bill is around 130 basis points. In our opinion, this level of real rates is adequate for the current state of economic growth and we would expect this to be the last rate hike in this cycle. We would expect the repo rate to remain at 6.50% for the remainder of 2023.
Given the 25-basis points rate hike was widely expected, there was limited impact on the bond market. Bond yields moved up 3-5 basis points after the policy announcement. We continue to expect the bond yields to go down over the medium term with improvement in external and fiscal balances and falling inflation.
Given the fact that a sizable rate hike has already been delivered and the starting yields of bonds are between 7.0%-7.5%, bond funds are likely to do better over the coming 2-3 years. Investors with a 2-3 year investment horizon and some appetite for intermittent volatility, can continue to hold or add to dynamic bond funds.
Continued reduction in the durable liquidity surplus will keep short-term rates elevated which should be positive for short-term debt fund categories like the liquid fund. We would expect further improvement in the return potential of these categories as interest accrual on short-term debt instruments has risen meaningfully. Investors with shorter holding periods and low-risk appetite should stick to Liquid funds.
