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Published on 30/09/2022 1:26:04 PM | Source: Quantum AMC

Comment on RBI Policy by Pankaj Pathak,Quantum AMC

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Below Comment on RBI Policy by Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC

The policy was broadly in line with the market expectation. The fact that the RBI kept the policy stance unchanged as ‘withdrawal of accommodation’ indicates the door is open for a further hike in the policy repo rate. The terminal rate expectation in the bond market has moved up to 6.5%.    

Aggressive monetary tightening in the advanced economies will continue to weigh on domestic monetary policy. It would be difficult for the RBI to soften its stance in such a hostile global environment.

Declining banking system liquidity over the last few months has put upward pressure on short-term money market rates. The RBI seems comfortable with prevailing liquidity conditions and there was no indication of durable liquidity infusion at this stage. This keeps the OMO purchases of bonds out of the picture for now.  

The RBI guided to keep the banking system liquidity near neutral through variable rate repos and reverse repos. This should support the short-term bonds though longer tenor bonds may face some pressure in absence of OMO purchases by the RBI.

We expect the 10-year Gsec to continue to trade in a range of 7.2%-7.6%. Short-term money market rates will move higher along with the policy repo rate.

We should expect interest rates on fixed deposits as well as on home loans to move higher.

For long-term fixed income investors, dynamic bond funds are best suited in this volatile market environment for a 2-3 year investment horizon. Investors with a low-risk appetite and shorter holding periods should stick to liquid funds.

 

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