Outlook on RBI Monetary Policy Committee from TRUST Mutual Fund
Below the Outlook on RBI Monetary Policy Committee from TRUST Mutual Fund
Market Reactions
Bond markets going into the policy were not pricing in a rate cut. The markets were expecting lower projections on the inflation forecast and higher projections on the growth forecast. The markets were anticipating some measures on durable liquidity support through Open Market Operations (OMO). The RBI announced OMO purchase of 1,00,000 crore in December and USD 5 bln of FX swap to inject durable liquidity into the system which is a clear positive for the bond markets.
Outlook
With today’s reduction of 25bps, the Repo rate stands at 5.25%, very close to the pre-covid policy rate. The economic growth projection is also strong at 7.3% for FY 26 and 6.75% for the first half of FY27. Inflation forecasts for FY26 is at 2% and 1 half FY27 at 4% at the MPC target. We believe that the fiscal measures taken by the government in conjunction with the monetary accommodation by RBI paves the way for a stable interest rate environment that may help in a strong economic growth. The real rate stands at 125-150 bps which may ensure non-inflationary economic growth. This will also enable the MPC to keep the repo rate at lower levels for an extended period of time. We believe that the MPC should hold the repo rate at 5.25% in subsequent policies and work towards policy rate transmission into the broader economy on a sustainable basis. st
The key risk emanating to macroeconomic stability in the recent months has come from a depreciating INR vs the USD and all other major currencies of the world. Although our current account deficit is manageable, the risks of it going up have increased. The net inflows through capital-account have not been large this year. The RBI has been using various tools including the foreign exchange reserves to arrest higher INR volatility. Keeping positive real rates and stable rates will also help in arresting higher currency volatility.
On liquidity we think that the RBI will ensure higher durable liquidity and adequate banking system liquidity leading to transmission of policy rates on lending and deposit rates. We expect 10-year Indian government bond to trade in a band of 6.40% to 6.75% in the coming months. Over and above the INR 1,00,000 crore in December, we think the RBI will have to conduct further OMO in Jan-March quarter as well.
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