The Monetary Policy Committee (MPC) decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6 percent from 6.25 percent earlier.
Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25 percent. The MPC also decided to maintain the neutral monetary policy stance.
This move seems largely in line with our and market expectations. The RBI also seems concerned about the likely impact of global slowdown on domestic growth.
In line with this, the RBI has revised the GDP growth outlook for FY20 from 7.4 percent to 7.20 percent. The CPI inflation forecast has also been lowered to 2.9-3 percent in H1:2019-20 and 3.5-3.8 percent in H2-2019-20, with risks, broadly balanced.
The bond market had already baked in such an outcome and hence the response post policy was quite tepid. Another key factor influencing market is the liquidity in the banking system.
The RBI had announced a USD 5 billion rupee dollar FX swap wherein banks would get rupee in lieu of swapping dollar with the RBI for a period of 3 years.
This we believe is a masterstroke from a liquidity injection perspective and such continued measures would certainly augur well for the fixed income markets.
Additionally, with a view to move further towards harmonisation of the effective liquidity requirements of banks with the LCR (liquidity coverage ratio), the RBI decided to permit banks to reckon an additional 2 percent of government securities within the mandatory SLR requirement.
This to an extent will help better liquidity at banks. It also could address the transmission concerns, which continue to be the centre point of debate at all times.
While bond yields, especially corporate bond yields, have been easing, the government bond yields haven’t kept pace. This is largely due to concerns emanating on the fiscal side – whether the government would really toe the line of fiscal discipline.
Given the rate cut, as the carry looks attractive, we do see some support coming in for the government bonds at higher yields.
While foreign investors continue to be net sellers in Indian debt, CY2019 year to date (~Rs 6000 crore), the sentiment seems to have changed a tad for the positive.
Going forward, general elections in India would assume significance and markets would continue to watch out for cues emanating thereof.
As such, India fixed income yields currently are offering a compelling carry to be availed of by domestic and foreign investors alike
(The author is Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company)
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