Quote on MPC announcement : RBI pauses and retains stance - It`s a turning wicket, need to select shots carefully from Mr. Gurvinder Singh Wasan, JM Financial Asset Management
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Below the Quote on MPC announcement by Mr. Gurvinder Singh Wasan (CFA), Senior Fund Manager and Credit Analyst (Fixed Income), JM Financial Asset Management Ltd
RBI has kept the repo rate unchanged at 6.5% (Marginal Standing
Facility (MSF) at 6.75% and Standing Deposit Facility (SDF) at 6.25%) with 6-0
votes and retained stance of ‘withdrawal of accommodation’ with a vote of 5-1.
RBI has retained GDP forecast at 6.5% for FY’24 and inflation forecast at 5.4%.
Key takeaways for us are:
a) RBI has forecasted 5.2% CPI for Apr 2025 to Jun 2025 quarter
which remains higher than target of 4%. RBI has clearly mentioned that keeping
inflation within the tolerance band of 4%+-2% is not enough and would aim to
get it to target of 4%.
b) RBI has also mentioned that India’s growth is likely to remain
resilient while remaining concerned about recurring food led CPI, lower Kharif
crop sowing, El Nino conditions, volatile energy prices anchoring into higher
inflation expectations.
c) RBI has also mentioned that globally policy rates are likely to
remain higher for longer.
d) RBI has summarised very well that it’s a turning wicket and
would be selecting shots carefully. It is expected that globally rates are
likely to remain higher, there are data points indicating softness. However,
given domestic scenario shows growth remains resilient and inflation target of
4% is still not achieved, RBI has shown the need to be vigilant as there is no
room for complacency.
Given these, it is expected that there is no visibility of rate
cuts as of now. RBI has also mentioned that they would be managing liquidity
(OMO sales have been mentioned as well) actively as sustained periods of excess
liquidity remains a risk to price and financial stability
Bond yields are trending higher due to tight liquidity, volatile Brent, El Nino and its impact on inflation, strengthening dollar and its impact on rupee, demand supply mismatch in US as it continues on the path of higher supply of sovereign securities due to high fiscal deficit with lesser demand for the same as the FED is in a Quantitative Tightening (QT) mode vs Quantitative Easing (QE) mode as in the past and appetite from foreign banks for US securities seems to be also lower. On the other hand, bonds can find buyers at higher yields due to factors like inclusion in Global bond Indices, positive real rate environment coupled with softening core inflation and relatively balanced demand-supply dynamics in second half of the year
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