RBI’s Monetary Policy Committee in its October policy kept key policy rates unchanged. In its fourth bi-monthly policy statement for 2021-22, the MPC projected consumer price index-based inflation for the October-December period at 4.5%.
The RBI also said that it will maintain an accommodative stance on rates as long as required. Long pause on rates brings uncertainty to fixed income funds.
Here’s what top mutual fund managers have to say about the RBI policy.
Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund
Given the recent RBI’s market actions, the policy outcome was along expected lines as the central bank continued its hesitant steps towards normalization of liquidity.
As expected in this effort, the GSAP auction was the first casualty in which RBI did not announce any incremental GSAP. Also, the Governor’s statement attempted to pacify the markets by not projecting any of these measures as a reluctance to housing and promising measures like OMO/Twist/GSAP, if market conditions warrant.
While additional measures have been announced to absorb liquidity under 14D VRRR with additional 28D VRRR, if required, the measures taken at present do not address sustainable absorption of surplus liquidity amounts.
In the absence of sustainable absorption, it is unlikely that short-end rates will directly approach policy rates. Market direction is expected to remain volatile as a plethora of additional measures will remain.
While near-term domestic CPI prints may provide some respite, external factors such as commodity prices and reluctance of monetary accommodation globally could unbalance it.
Vikas Garg – Head Fixed Income Invesco Mutual Fund
“When the boat is close to shore don’t shake it, there is life ahead of it” says it all. The MPC policy reiterates on the same – continuing monetary policy support to ensure growth revival in a sustainable manner as inflation moderates.
We believe the direction is – “The repo rate will remain low for a long time, at the highest early next year through gradual policy normalization in a non-disruptive manner as well as further liquidity recalculation and narrowing of the policy rate corridor.” More likely”
Pankaj Pathak, Fund Manager – Fixed Income, Quantum Mutual Fund
For all practical purposes, much was expected from this policy, but the RBI maintains the status quo in its monetary policy announcement. The repo rate remains unchanged at 4%, the reverse repo rate remains at 3.35% and the monetary policy stance remains accommodative. The governor, however, called it gradualism and did not want to rock the boat.
This comes at a time when oil prices, India’s plight looks ominous; Global demand is leading to supply crunch and rising prices for various commodities at a time when ground level inflation appears to be higher than reported inflation.
We felt that RBI could at least guide the markets that rates would be raised in the coming months. RBI’s efforts to flush out and manage excess liquidity are also minimal and will not have much impact on short-term interest rates.
The biggest surprise was the complete removal of G-SAP. In the backdrop of higher oil prices and rising US Treasury yields, removal of G-SAP should boost long-term bond yields. Investors should expect higher volatility and lower returns in long-term debt funds.
Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund
At today’s bi-monthly MPC meeting, the MPC voted 5:1 and unanimously (6-0) to maintain an accommodative stance to keep key rates unchanged.
Maintaining a neutral tone, and avoiding any surprises, the RBI seemed comfortable with the ongoing growth-inflation dynamics. Given the slow monthly pace of price growth and favorable base effect in the coming months, CPI inflation for FY22 was sharply reduced (40 bps) to 5.3% from 5.7% earlier. The growth forecast for FY22 has been left unchanged at 9.5 per cent.
As expected, the policy narrative focused on steps to take back the excess liquidity which is now over INR 12 trillion.
The new measures include a calendar proposing a gradual increase in the amount to be absorbed under the 14-day variable reverse repo rate (VRRR) from INR 4 trillion to INR 6 trillion (by December 3). Also, a new 28-day VRRR is likely to be introduced if needed. Even after the additional liquidity suction, RBI has projected a liquidity surplus under fixed rate reverse repo at INR 2.5 to 3 trillion.
Importantly, the G-Sec Acquisition Program (G-SAP) is being wound up, with proper anchoring in the long-end yield achieved and sufficient liquidity (G-SAP) of Rs 2.37 trillion already in the first half of the current financial year. SAPs and OMOs) as against Rs 3.1 trillion for the full FY 2021.
Despite the partial measures initiated for easing support for bonds and liquidity moderation measures, the RBI reiterated its readiness to act if needed.
Today’s move is likely to further flatten the yield curve as the short end reacts to gradual liquidity withdrawals over time.