Pankaj Pathak, Fund Manager – Fixed Income, Quantum AMC
As widely expected, this was a do-nothing policy. Given the RBI has already lifted the effective policy rate by 290 bps in the last financial year, it makes sense to wait for the past rate hikes to transmit through the real economy.The highlight of this policy was the RBI’s emphasis on getting to the ultimate goal of 4% headline inflation. The governor aptly used the quote – “The ideal must not be lowered” to suggest that we shouldn’t get too comfortable with inflation falling to 5%. The headline CPI inflation is still far from 4% target. This quashes any possibility of a rate reversal this year. We would expect the policy repo rate to stay at 6.5% for a long period.
On liquidity, the RBI did acknowledge that deposit of Rs. 2000 denomination currency notes will add to the already high liquidity surplus in the banking system. However, they chose not to deploy any durable liquidity absorption tool to reduce the excess liquidity. In our opinion, this should result in further decline in short term money market rates.
From the broader bond market’s perspective, this policy was neutral to slightly hawkish. Going forward, we would expect bond yields to move up from current levels – pricing for uncertainty around the monsoon and inflation impact of higher than usual increase in minimum support prices for the kharif crops.
Investors with 2-3 years holding period should take a medium term and can invest in dynamic bond funds as long term fixed income allocation. Investors with shorter holding period should stick to Liquid funds.
Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund
“The Monetary policy statement reiterated its commitment on withdrawal of accommodation to ensure inflation progressively aligns with the target, while supporting growth. Headline inflation is projected to decline in 2023-24 from its level in 2022-23 but still be above the target of 4 % , warranting continuous vigil. GDP growth is maintained at 6.5 % levels and CPI inflation is projected at 5.1 % versus 5.2 % stated in the April 2023 policy. RBI, consumer survey on CPI inflation is projecting 60 basis points fall in inflation expectations from September 2022 levels. However, early results of RBI surveys polled for manufacturing, services and infrastructure firms expect input and output prices to harden. This survey and global development of interest rate hikes by developed countries like Australia and Canada has led to RBI adopting marginal hawkish stance. Macro-economic factors are favorable like lower commodity prices, lower oil prices. Food inflation is moderating due to record rabi production . The Rupee is expected to be stable due to lower current account deficit, FII Inflows of 8.2 billion in the current financial year. All these factors could bring current year CPI inflation below 5 % levels against RBI projection of 5.1 % levels. The 10 year g sec yields is expected to trade in the band of 6.95 to 7.10 in the coming months.”
Prashant Pimple, Chief Investment Officer – Fixed Income, Baroda BNP Paribas Asset Management India
The Monetary policy outcome was in line with our expectations in terms of status quo on policy rates and lowering of FY 24 CPI projections to 5.10 from 5.20% ; however, MPC preferred to be in a wait and watch mode with as Governor mentioned “ arjuna’s eye “ towards inflation.
With 1 year forward real rates in a positive territory and somewhat a goldilocks economy for the domestic markets ; We expect a long pause by RBI for this calendar year. We expect the yield to bear steepen from here.
Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund
“The Reserve Bank of India maintained status quo on Policy rates as expected and confirmed the expectations of a long pause with a slightly hawkish undertone as it retained the Monetary Policy stance at “Withdrawal of accommodation to ensure that Inflation progressively aligns with the target, while supporting growth.” The central bank acknowledged the recent softness in Inflation prints by reducing its Inflation forecast for FY24 to 5.10% from 5.20% earlier. The growth forecast was retained at 6.50%. We see the policy as hawkish relative to market expectations as the RBI Governor, in his statement, reiterated that Inflation coming down within the Inflation targeting threshold was not enough and that RBI and MPC remain focussed on bringing Inflation down towards the target of 4%.”
Sandeep Bagla, CEO, TRUST AMC
It is a pause, and the possibility of the next move being a cut is far higher than that of a hike. Growth remains resilient and the inflation while moderating now, could rise in the future as labour market remains tight and wage-inflation spiral remains a distinct danger. Australia and Canada have raised rates after a pause. We are not out of the woods yet. Liquidity surplus will have to be reduced as Rs.2000 notes seep into the banking system liquidity. It is quite possible that market yields rise by a few basis points as RBI waits for more economic cues amidst continued global contradictory cues on inflation and growth fronts.
