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Below are views on the Monetary Policy announced by the RBI earlier today by Ms. Bekxy Kuriakose, Head – Fixed Income, Principal Asset Management

At its Review meeting conclusion announcement today, RBI MPC kept key rates unchanged and stance at accommodative as was widely expected. Pace of moderation in global economic activity, improving but still weak domestic demand overcast by the pandemic and need to nurture nascent and hesitant market recovery were cited as the key reasons. It’s interesting to note that the accommodative stance was not entirely unanimous like last time but had a single dissent vote. While expressing surprise and concern at the recent inflationary pressures, RBI MPC is hopeful that the monsoons coupled with recent softening in global crude oil prices and supply side measures by government should help to reduce inflation in the coming months. Taking note of these concerns however and the increase in banking system liquidity thanks to RBI intervention in forex and gilt markets, the most significant announcement has been to increase the quantum of VRRR (Variable Rate reverse repo) auctions from the present fortnightly Rs 2 lakh cr to Rs 4 lakh cr in a graded manner till September 2021.

Other relief measures include extension of On tap TLTRO scheme till Dec 31^st, 2021 as well as MSF relaxation upto same date.

Given the announcement on VRRR front, we expect that going forward in next two months we may see rise in short term Tbill, CD/CP rates upto 1 year maturity as higher amounts get locked into VRRR. Overnight rates (in form of TREPs) which were recently trending towards 3% should come closer to the reverse repo band of 3.35%. While gilt prices have reacted negatively post the announcement and yields have gone up 3-4 bps, given RBI’s reiteration and commitment for orderly evolution of yield curve and continued support in form of G-Sap, other OMOs and auction interventions we do not expect sharp rise in medium to long end yields.

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