RBI Rate Hike - Quote by Arvind Chari – CIO, Quantum Advisors & Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC

 Comment BY Arvind Chari – CIO, Quantum Advisors

The Monetary Policy Committee (MPC) of the Reserve Bank of India hiked the Repo rate by 40 bps to 4.4% and increased the Cash Reserves Ratio(CRR) by 50 bps in a surprise, unscheduled, inter-meeting decision.

Although this was a MPC decision, we believe this move had Governor Das imprints all over it. We had likened Governor Das’s comments during the pandemic on ‘remaining accommodative as long as necessary’ to the famous comment by Mario Draghi ‘whatever it takes’ to save the Euro. With this move, we see shades of Governor YV Reddy who believed in ‘shock and surprise’ as potent monetary policy tools.

The markets, mollycoddled by previous RBI comments and supporting the RBIs earlier stance, will feel cheated. The ‘shock and awe’ was visible with Bond yields rising sharply, especially at the shorter end of the curve. The 5 year government bond is now trading above 7%. The 10 year bond is at ~7.4%.

Three things seem to have driven todays decision:

1. The April inflation reading to be much higher than RBIs and market expectations
2. RBI officials meetings in the World Bank-IMF spring meetings and their feedback on the stance and hawkishness of global central bankers and that how much behind the RBI is in its response
3. Hiking before the FED decision as a signal to the markets that the RBI is acting on its own and not being forced by any actions by the US FED.

All three are essentially a move to boost its credibility and to manage market expectations.

Given that we had chided the RBI for its ‘needlessly dovish’ February policy, we would applaud the RBI to have responded in this manner and acknowledging that circumstances have changed.  Many will yet think that RBI is late and behind the curve, but todays move states that this is an RBI willing to admit  and adjust to changing data points and changing global monetary policy environment. That is a good sign and should renew some of its lost ‘inflation fighting’ credibility.

Comment from Pankaj Pathak, Fund Manager – Quantum AMC.

We expect the RBI to hike the Repo rate in the first phase back to the pre-pandemic level of 5.15%. This may happen in the next 2/3 meetings. Post that, we would expect the Repo to range in the 5.5%-6.0% level in the coming year.

This is indeed good news for investors in the liquid funds. As the RBI hikes and removes liquidity, potential returns from low market risk, accrual funds like liquid funds will improve as compared to savings bank accounts. Some of these funds looks to be a better alternative than short term fixed deposits. As we have maintained since the last year, the best way to play the rate hiking cycle is by investing in liquid, money market funds.

We had also guided that, as the RBI hikes, it will also be a good time to slowly start investing in bond funds with a 2/3 year investment horizon. With the 5 year government bond yielding close to 7%, as compared to a potential repo rate of 5.5%-6.0%, it is getting attractive to allocate to bond funds over fixed deposits.  A phased lumpsum or a monthly SIP over the next year for a portion of your fixed income allocatioj can be considered in short term or dynamic bond funds, with full cognisance that the interim period will be volatile.