Note on RBI policy by Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund

2025-04-10 03:33:24 pm | Source: PGIM India Mutual Fund

Note on RBI policy by Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund

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Below the Note on RBI policy by Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund

A Dovish RBI with Focus on Growth

The MPC policy meeting today was as dovish as it could get. MPC delivered a 25bps policy rate cut which was expected by the markets and also changed the monetary policy stance to “Accommodative” which was not fully discounted by the markets and comes as a positive surprise to the markets. The MPC decision to lower the policy rates and the change in monetary stance to “Accommodative” was unanimous.

MPC lowered both the GDP growth and inflation forecast by 20 bps each to 6.50% and 4.00%, respectively. The forecast is basis the assumptions laid out in the Monetary Policy Report (April 2025) for FY2026 which forecasts average crude oil prices at USD70/bbl, average USD/INR at 86.00 and the global GDP growth at 3.1% in CY2025. The governor also spoke about providing adequate liquidity ~1% of the NDTL, which means that the SDF rate (5.75%) can become the operational rate if the LAF liquidity consistently stays surplus above 1.50 lac cr.

The MPC statement, while giving the rationale for their decisions, noted that “inflation is currently below the target, supported by a sharp fall in food inflation. Moreover, there is a decisive improvement in the inflation outlook. As per projections, there is now a greater confidence of a durable alignment of headline inflation with the target of 4 per cent over a 12-month horizon.” The language of unambiguous focus on inflation was dropped.

On growth, the statement mentioned “ impeded by a challenging global environment, growth is still on a recovery path after an underwhelming performance in the first half of 2024-25. While the risks are evenly balanced around the baseline projections of growth, uncertainties remain high in the wake of the recent spurt in global volatility. In such challenging global economic conditions, the benign inflation and moderate growth outlook demands that the MPC continues to support growth.”

We think that there is a clear cut support for growth from RBI with a lesser concern on inflation. Given the rising global uncertainties from trade tariffs and a domestic slowdown in growth, the risks to growth are on the downside and we believe that monetary policy will play a proactive role in supporting growth, opening up room for deeper and front ended rate cuts barring any global shock.

Market Reaction

Bond yields sold off at the start of the day following the sharp surge in US bond yields overnight but got support post MPC meeting as the monetary policy was unambiguously dovish. The benchmark 10yr bond yield ended the day at 6.44%, down 10bps from the intraday high and lower by 3bps from yesterday’s close. We think that yields would have fallen more had it not been for the sharp uptick in US/global bond yields.

The clear message from the RBI governor on providing adequate liquidity (1% of NDTL) means that the transmission of Monetary Policy will be on track and the Money Market curve will continue to shift lower as we have seen over the last month. Yields were lower across the curve and the curve steepened with rising expectations of deeper and frontloaded rate cuts. The OIS curve also shifted lower with a steepening bias as the 1yr OIS was down 6 bps while the 5yr OIS was lower by 2 bps.

Our View: Rate cuts to continue barring any Global Shock

We think today’s policy was an acknowledgement of material risks to growth and the need to support growth through a proactive monetary policy. RBI had been aggressive in infusing liquidity over the last couple of months through OMO Purchases and FX swaps. The curve has steepened since the beginning of this year as seen in spread widening between 10 yr and 30 yr spread.

The 10yr yield has fallen by 32 bps since the beginning of CY2025 while the 40yr yield has come down by 14 bps and we believe that the curve will continue to steepen, especially now given the expectations of more rate cuts and that too frontloaded.

Risks remain in the form of the short position of RBI in the USD forwards market to the tune of 89 bn (as of Feb end) and the well-known global uncertainty and volatility. In the absence of any global market shocks, we believe that RBI will cut rates incrementally by 50-75 bps along with proving adequate liquidity for monetary transmission to take place. We expect the yield curve to continue to steepen incrementally and the 10yr Bond yield to go lower towards 6% over the course of the next 6 months though the journey may not be smooth given the global market volatility.

Investors with medium to long term investment horizon can consider funds having duration of 6-7yrs with predominant sovereign holdings as they offer a better risk-reward currently. Investors having an investment horizon of 6-12 months can look at Money Market Funds as yields are attractive in the 1yr segment of the curve.

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Note on RBI policy by Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund

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