Quote on RBI Credit Policy by Arvind Chari – CIO , Quantum Advisors

Quote

We found the MPC statements and the comments from the RBI governor to be needlessly dovish. The bond markets have already priced in a move away from accommodative policy in the months to come. Maybe they felt some segments of the bond market are over-reacting and hence wanted to temper the actions by maintaining status quo.

However, the RBI should be preparing the markets on the change in policy. The backdrop has changed. A) Global commodity prices pressures remain. B) The developed world central bankers are normalising monetary policy. C) We are no longer in crisis and hence do not need crisis time rates and monetary support.

Growth already seems to have recovered to long-term trend levels. Also, given that the government has assumed the mantle of supporting and reviving growth, the RBI needs to prioritise financial stability and inflation.

The RBI would have been better off guiding on how they would normalise liquidity and interest rates in the coming months.

We do understand that the Indian economic cycle is different and inflation pressures are lower due to contained food price inflation. Also, there may be an effort by the RBI to try and de-link India from the actions of the developed world central bankers.

The MPC and the RBI also seem to be drawing a lot of comfort from the CPI forecast for FY 23 @ 4.5% and hence signalling they have enough space and room to continue with accommodative stance and decade low policy rates. That CPI estimates seems well below market forecasts and I believe assumes lower oil prices/ or lower pass throughs.

For now, this delay in rate normalisation would mean that bond markets will rejoice for a while. Long-term bond yields are back towards pre-budget levels.  

Todays’ outcome is even better for the short to medium term segments as that was more susceptible to any changes in RBI liquidity and interest rates policies.

For the medium to longer end of the bond markets, it is back to watching oil prices, US treasuries and the weekly demand/supply situation in the auctions.

We continue to maintain that the RBI will move its policy stance to neutral. It will move the operational policy rate to the Repo rate. And it will hike the Repo rate by 100 bps by March 2023.

Liquid funds remain a good way to play this interest rate tightening cycle.

Given the steepness of the yield curve, there are opportunities at some segments of the government bond yield curve. If you have a time horizon of 3 years+, then a combination of liquid fund and say a dynamic bond may work well over locking in at current rates in fixed deposits, provided you gradually increase your allocation to dynamic/long term bond funds on every rise in market yields in the coming year.