RBI retains repo rate at 6.5%, GDP growth at 7%, inflation at 5.4% (Ld)
In its latest review of the annual monetary policy, the RBI has explicitly highlighted the need to use OMO sales as a means to modulate liquidity, which will, effectively, weigh down bond market sentiments. Concerns on food inflation were duly highlighted. OMO-sales can help manage liquidity and be consistent with the stance of the monetary policy. However, RBI governor Dr Shaktikanta Das maintained that timing and quantum of such operations will depend on evolving liquidity conditions. Inflation risks, as per Kotak Institutional Equities, remain on the upside given weather related impact as well as commodity prices. Global monetary conditions will also weigh on RBI’s policy decisions. The good part is that growth remains resilient and core inflation is kept under check. We maintain our call for a prolonged pause on repo rate at 6.5 per cent well into FY2025, while liquidity over the medium term will be aimed at being close to neutral. Analysts believe that it’s a déjà vu at RBI MPC to maintain status quo on key benchmark rates. Of course, there is a sense of caution as inflation rise can act as a major macro headwind.
The RBI rightly acknowledged slowdown in growth parameters, yet India remains an oasis in the desert and analysts’ GDP growth estimates have been retained at 6.5 per cent. Headline CPI forecast has been retained at 5.4 per cent, which was on expected lines. We do expect downward movement in CPI in the coming months. Hence, bond markets may get some breather over medium term as a section of markets was expecting upward revision. No new announcements on liquidity front may offer some solace to short end of the yield curve to remain anchored. OMO sales may be undertaken, if need be, but that is something markets are used to, but with auction and OMO sales not meeting with commensurate demand, bond yields could stay elevated near term. What matters is how the US treasuries behave going forward-we have seen levels recede from 4.90 per cent to the current 4.70 per cent. Crude is less rude and has shown some easing lately, though it not fully out of the woods.
We expect Indian bonds to trade range bound with cushion at 7.25-7.30 per cent levels, reveals a study by Kotak Alternate Asset Manager. With policy decision out of way, Indian equities will turn attention to the earning season, which has just begun. Expect volatilities and consolidation as we move ahead in this quarter. RBI’s decision to use OMO sales to modulate liquidity is praiseworthy as this will weigh down bond markets’ sentiments. Food inflation can impart upside to headline inflation. Though liquidity conditions are likely to ease in the near term amid reversal of I-CRR funds on October 7 and government spending, the CIC leakage in the upcoming festive season and intermittent FX intervention are likely to counter the impact.
