Quote on RBI Monetary Policy Comment by Mr. Avnish Jain, Head Fixed Income, Canara Robeco AMC
Below the Quote on RBI Monetary Policy Comment by Mr. Avnish Jain, Head Fixed Income, Canara Robeco AMC
"The Monetary Policy Committee (RBI-MPC) was full of surprises. The RBI MPC surprised markets by announcing 50bps rate cut against market expectations of 25bps. The MPC then threw in, a negative surprise, by changing stance to “neutral”. The RBI MPC had only changed stance in last policy to “accommodative”. RBI MPC may have been concerned by global headwinds in terms of US tariff war, and continuing fragile geo politic situation. US FED further has been on hold and may only start reducing rates once tariff situation is more clear. This may happen in 2HCY2025. The Governor noted that the growth inflation dynamics called for front loading on rate cuts. RBI MPC reduced the inflation projection to 3.7% from 4%, whilst maintaining GDP growth at 6.5%.
On liquidity front, RBI cut CRR by 100 bps (to be done in 4 tranches from Sep 6 2025) to further enhance liquidity in the market, as it perceived that the previous policy action transmission was not as expected. This will release about Rs.2.5 lac crore of liquidity in the market during the busy season.
The shift in stance means that rate action in next policy is unlikely, and the policy may remain in a longish pause. RBI Governor also noted that with current conditions, room for further rate cuts is limited. RBI is likely to continue to watch inflation and growth conditions to determine future policy actions.
The market gyrated, initially 10Y yield dropped to 6.11%, before the stance change took it 6.21%. The RBI Governor further announced 100bps CRR cut, which again led to partial recovery in markets. However, going forward, market yields may be rangebound, as liquidity continues to remain ample and post 50bps rate cut, overnight rate may hover around 5.20-5.3% range (bottom end of the LAF corridor). Markets may now be driven more by global cues with an eye on the US trade policy. In the short term, 10Y yield may hover between 6.20-6.35% range."
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