Comment on RBI Credit Policy by Pankaj Pathak, Fund Manager – Fixed Income, Quantum AMC

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As widely expected, this was a do-nothing policy. Given the RBI has already lifted 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.

The highlight of this policy was though the RBI’s emphasis on getting to the ultimate goal of 4% headline inflation. The governor aptly used the quote - “The ideal must not be lowered” to suggest that we shouldn’t get too comfortable with inflation falling to 5%.   The headline CPI inflation is still far from 4% target. This quashes any possibility of a rate reversal in this this year. We would expect the policy repo rate to stay at 6.5% for a long period.

On liquidity, the RBI did acknowledge that deposit of Rs. 2000 denomination currency notes will add to the already high liquidity surplus in the banking system. However, they chose not to deploy any durable liquidity absorption tool to reduce the excess liquidity. In our opinion, this should result into further decline in short term money market rates.

From broader bond market’s perspective, this policy was neutral to slightly hawkish. Going forward, we would expect bond yields to move up from current levels - pricing for uncertainty around the monsoon and inflation impact of higher than usual increase in minimum support prices for the kharif crops.

Investors with 2-3 years holding period should take a medium term and can invest in dynamic bond funds as long term fixed income allocation. Investors with shorter holding period should stick to Liquid funds.