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Below the MPC Commentary by Basant Bafna, Head - Fixed Income, Mirae Asset Investment Managers (India)

RBI struck a cautious tone in its policy, with downside risks to its FY 27 growth projections of 6.90% and upside risks to its inflation projections of 4.60% in the background of supply side pressures emanating from the prevailing geopolitical conflict over the medium term, even as a temporary truce emerged overnight.

Prior to the policy, markets cheered the news of the temporary truce, with benchmark yields falling by ~ 12 bps with similar movement of ~ 10-15 bps across Corporate Bonds and Money Market yields. As there was no announcement in relation to additional OMOs as well as re-introduction of the FCNR (B) window, yields remained broadly stable as an outcome of the policy meeting.

On inflation, the MPC highlighted a range of factors; from energy shocks feeding into inflation and growth, to second?order effects on manufacturing, trade disruptions from blocked routes, and the looming threat of El Niño as key risks to its overall outlook.

On liquidity front, RBI noted that WACR has remained at the lower end of the LAF corridor for most of the previous quarter and comforted markets towards adequate liquidity going forward to ensure seamless transmission. On future policy outlook, RBI committed to remaining nimble towards emerging geopolitical developments.

Going forward, expectations remain for a prolonged pause in policy rates with the curve expected to continue its steepening bias going forward with the 1-3 year segment remaining attractive as spreads of ~ 225-250 bps above overnight rates remain higher vis-à-vis historical averages.

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