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Below is quote on Monetary Policy by 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 rates 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 advance economies are expected to have mild recession only .

The policy was broadly on expected lines, but some section of the markets expected a change in stance to neutral.  US Federal Reserve is expected to rise 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 led to higher savings in the economy and reduce discretionary spending including demand for loans as repo rates hike get transmitted into 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 rates 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.”

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