Quote on RBI MPC Note by Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund
Below the Quote on RBI MPC Note by Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund
The MPC policy meeting today was as dovish as one could get in the current circumstances of INR weakness and higher-than-expected GDP growth. The policy repo was unanimously reduced by 25 bps while retaining the monetary policy stance at “Neutral.” The decision on policy rates was unanimous, but on the monetary policy stance, Prof. Ram Singh opined that the monetary policy stance should be changed to “Accommodative.”
Apart from the rate cut, the RBI Governor announced OMO purchases of government securities worth INR 1 trn and a 3-year USD/INR Buy-Sell swap of USD 5 bn. This liquidity infusion pertains to only this month. Thus, today’s MPC policy and RBI’s steps on liquidity clearly show RBI’s and MPC’s comfort on inflation and macroeconomic stability. The bond market was divided on the rate cut as the Q2 GDP print had surprised to the upside and the INR has weakened quite sharply even as inflation hit a historic low.
The MPC showed comfort on inflation as it lowered its FY26 and 1HFY27 inflation forecasts by 60 bps and 50 bps respectively. CPI inflation for FY26 is now projected at 2%. CPI inflation for Q1FY27 is forecasted at 3.90% and Q2FY27 is forecasted at 4.00%.
The MPC statement further stated that “the underlying inflation pressures are even lower as the impact of increase in price of precious metals is about 50 bps.” On growth, GDP numbers were raised from 6.8% to 7.3% for FY26, though the RBI Governor stated in the post-policy press conference that he expects “growth to somewhat slow.” In conclusion, the MPC statement mentioned that “the growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum.”
Given the INR’s relative underperformance among other emerging markets and the stronger growth numbers, RBI’s and MPC’s stance today clearly showed that they will be guided by the inflation-targeting mandate, and if the current and the forecasted inflation is within or below the target, then monetary policy will remain accommodative. Today’s policy also shows that RBI is not unduly perturbed by the recent bout of INR depreciation and remains confident about macroeconomic stability.
Market Reaction & Our View
Going into the MPC policy, the bond market was divided on the prospects of a rate cut and was eagerly looking forward to liquidity infusion measures like OMOs. The policy did not disappoint the markets on both counts, though the market reaction was muted, showing the current supply overhang (there was an INR 320 bn auction of the 10-year benchmark security). Going ahead, the bond market will get support from OMOs and the possibility of inclusion in the Bloomberg Global Aggregate Bond Index. The benchmark 10-year bond yield was down 2 bps, though the longer-duration securities were down by 5 bps. The market is perceiving today’s policy to be dovish, and bond yields, in our view, will soften going ahead.
Corporate Bond Funds with up to 5-year duration present an attractive investment opportunity from a risk/reward perspective. Dynamic/Long-Duration funds can be used tactically. Investors with a 12–18 month investment horizon can look at Corporate Bond Funds, given the attractive spreads amidst abundant liquidity. Investors having an investment horizon of 6–12 months can consider Money Market Funds as the current 1-year yield offers attractive carry and roll-down.
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