Views on RBI Policy: Ms. Bekxy Kuriakose, Head – Fixed Income, Principal Asset Management

The RBI MPC unanimously voted to keep status quo on the Repo rate. The reverse repo rate also remains unchanged at 3.35%. With a vote of 5:1, the stance is also unchanged at accommodative reflecting the continued need to support, revive and sustain growth. On inflation front key point made by the Governor in the Press Statement was that while there are input cost pressures, pass through to output prices has been constrained by weak demand conditions. Thus headline CPI has been contained in the 4+/- 2% band broadly so far. Das was at pains to clarify that while some developed and emerging market economies have started hiking rates, these are those countries where demand conditions are strong and inflation has crossed the tolerance level. This indicates that RBI is comfortable with current trajectory of domestic headline CPI which is within our tolerance band and this is the rationale for no change.

The overarching theme from today’s Policy review announcements is one of “gradualism”. Other key words are “calibrated and non disruptive”. Thus while GSap programme is discontinued for time being, VRRR (Variable Rate Reverse Repos) auctions are being increased in quantum from Rs 4 lakh cr to Rs 6 lakh cr and 28 day VRRR tenor has been mentioned and likely to be introduced soon. The emphasis was on continuing to ensure no major disruption in markets either on liquidity front or on interest rate front.

Post policy, ten yr gilt benchmark has risen, while 5 yr gilt and shorter tenors remain stable. Market fears of any tightening or change in stance have been laid to rest. However long end may remain under pressure due to withdrawal of Gsap support but the window has not been entirely closed as indicated by the Governor. Any sharp upmove in yields may see OMO announcements or OT (Operation Twist).

Looking forward while no rate hikes or change in stance is imminent and next few inflation prints may remain within RBI’s comfort band, in Calendar year 2022, there is likelihood of reverse repo rate being hiked, liquidity conditions being further normalized and short term money market rates rising by 25-50 bps. This rests on an assumption.

We would advice debt investors with 1 yr horizon plus to allocate to short term debt categories and with shorter horizon to allocate to low duration, ultra short or money market categories.

Disclaimer: The views expressed and information herein are independent views of the Fund Manager(s) and for informative purpose only and under no circumstances should be construed as an opinion or Investment advice. The information contained herein is not intended to be an offer to seek solicitation for purchase or sale of any financial product or instrument. The investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Sponsor, Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.