MPC Policy Commentary by Basant Bafna, Head – Fixed Income, Mirae Asset Mutual Fund
Below the MPC Policy Commentary by Basant Bafna, Head – Fixed Income, Mirae Asset Mutual Fund
The MPC raised the repo rate by 25 bps to 5.50%, its first hike since February 2023, and shifted to "calibrated tightening", a stance last used in 2018. The rate decision was unanimous, whereas the change in stance was passed with a majority of 4–2, possibly given significant liquidity tightening already undertaken alongside expected CIC increase going forward in view of the upcoming festive season. Upward revisions to growth (40 bps) and inflation (20 bps) support the reaction function: firmer growth lowers the cost of tightening, while supply-led price pressures from crude and El Niño raise the risk of second-round effects.
On liquidity, the RBI kept its options open, avoiding front-loaded tightening with surplus liquidity already down from ~?10.5 trillion to ~?5 trillion. Overall, the policy aligns the RBI with the global hawkish turn and represents an insurance hike to prevent the need for aggressive tightening going forward. We expect one more hike in December and a shallow cycle with developments in the Middle East and the second order impact of El-Nino closely watched. While the overall curve has turned steep and is factoring-in most negatives, we favour the 6 -18 month part of the curve which continues to offer attractive risk adjusted returns.
Above views are of the author and not of the website kindly read disclaimer
