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RBI Monetary Policy : Read between the lines - August 2023 by Axis Mutual Fund
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RBI Monetary Policy – Read between the lines
* With inflation as the top agenda for the central bank, the MPC action today can be perceived as a tad ‘hawkish’. Uncertainty on account of El-Nino patterns and external forces are likely factors affecting the MPC’s thought process. The big story was a surprise CRR action on incremental deposits raising eyebrows across market participants.
* Policy Decision
* Repo rate unchanged at 6.5%
* SDF rate unchanged at 6.25% and MSF rate unchanged at 6.75%
* All six members voted in favor of the pause.
* Five members voted to “remain focused on withdrawal of accommodation to ensure inflation progressively aligns with the target, while supporting growth”. Dr Varma voted against the stance.
* Incremental CRR of 10% on scheduled banks’ deposits on deposits made between May 19 and July 28, 2023
Market Reaction:
* The headline policy action was in-line with market consensus. Money markets have seen a marginal uptick of 5-10bps while corporate bonds and sovereign assets remain largely unchanged. The benchmark 10-year G-Sec stood at 7.167%
Our View:
* Policy actions and commentary are in line with our view. We retain our thesis of peak rates within the current market environment. With policy rates remaining incrementally stable, we have added duration gradually across our portfolios within the respective scheme mandates.
* Investors can look at actively managed strategies to capitalize from fluctuations in rate movements. While the overall call is to play flat/falling interest rate cycle over the next 18-24 months, markets are likely to 0.0 1.0 2.0 3.0 4.0 Nov-22 Feb-23 May-23 Aug-23 In Rs Lakh Cr Liquidity has spiked Banking Liquidity 4.50 5.50 6.50 7.50 Aug-22 Nov-22 Feb-23 May-23 Aug-23 Overnight markets have trended within the policy rate CCIL Overnight Rate Repo Rate see sporadic rate movements. In such a scenario, active funds are ideally positioned to toggle across duration and the ratings curve to optimize medium term returns.
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