Comment :
Going into the policy, the market expectation was for status quo on rates and a cautious tone on inflation. To that extent this policy was non-event. The fact that the RBI sees the current jump in vegetable prices to be transitory, has significantly lowered the uncertainty in the bond market. In the coming 2-3 months CPI inflation will be above the RBI’s upper threshold due to spike in vegetable prices. However, it should not trigger any policy response from the RBI.
The RBI also mentioned about an upside risk to inflation from possible El-Nino weather conditions and rising global food prices. This can have more durable impact on the inflation. However, from policy standpoint this is a tomorrow’s war. Healthy Kharif sowing and falling Non-food and Fuel inflation can offset some the negative impacts over the coming months. We expect the RBI to remain on an extended pause.
Incremental cash reserve ratio (ICRR) of 10% can take out little over Rs. 1 trillion from the banking system. Despite this the banking system liquidity will remain in surplus of more than Rs. 1 trillion in the next 1-2 months. Also, this is a temporary measure to manage the sudden increase in liquidity due to deposits of Rs. 2000 currency notes and RBI’s forex interventions. This should not have any durable impact on the bond yield curve though money market yields might inch up 10-15 basis points over the coming weeks.
We expect the Indian bond yields to remain in the broader range of 7.0%-7.3% over the coming months, tracking crude oil prices and the US treasury yields. Longer term outlook looks more favourable as the rate hiking cycle is near end in most economies around the world and rate cutting cycle can start early next year.
Investors with 2-3 years holding period should take a medium-term view and invest in dynamic bond funds as long term fixed income allocation. Investors with shorter holding period should stick to Liquid funds.
No comments:
Post a Comment