In its most recent policy review, the Monetary Policy Committee for the Reserve Bank of India (RBI) chose to keep a key short-term policy rate, the repo rate, steady at 6.50%.
In light of the decision, some debt fund managers have offered their opinions on what that means to investors.
“It is a pause, and the possibility of the next move being a cut is far higher than that of a hike,” Sandeep Bagla, CEO of TRUST AMC, said in a report by the Economic Times. “Growth remains resilient and the inflation while moderating now, could rise in the future as labour market remains tight and wage-inflation spiral remains a distinct danger.”
The general opinion among the mutual fund managers is that maintaining the status quo on the rate was widely expected as economic policymakers are waiting for the effects of previous rate hikes to trickle down to the economy.
“As widely expected, this was a do-nothing policy,” Pankaj Pathak, fund manager-fixed income for Quantum AMC, said. “Given the RBI has already lifted the effective policy rate by 290 bps in the last financial year, it makes sense to wait for the past rate hikes to transmit through the real economy.”
When rates change, it takes a while for the economic activity to adjust.
“Australia and Canada have raised rates after a pause,” Bagla said. “We are not out of the woods yet. Liquidity surplus will have to be reduced as Rs. 2000 notes seep into the banking system liquidity. It is quite possible that market yields rise by a few basis points as RBI waits for more economic cues amidst continued global contradictory cues on inflation and growth fronts.”
The RBI's emphasis on achieving the ultimate aim of 4% inflation was the policy's standout feature. The governor described the policy objective by saying, "The ideal must not be lowered" to warn against becoming complacent if inflation drops to 5%, Pathak said in the report. The CPI inflation is still much below the desired 4% level. This eliminates the chance of a rate reversal this year. The policy repo rate is anticipated to remain at 6.5% for a considerable amount of time, he said.
Regarding liquidity, the RBI did admit that the deposit of currency notes with a face value of Rs. 2000 will increase the already substantial liquidity surplus in the banking system, Pathak said. To minimize the excess liquidity, they opted not to use any long-lasting liquidity absorption tools.
“In our opinion, this should result in further decline in short-term money market rates,” he said.
Future bond yields are anticipated to rise from their current levels as investors price in the uncertainties surrounding the monsoon and the inflationary effects of higher-than-normal increases in minimum support prices for the kharif crops, Pathak said.
