RBI’s monetary policy committee kept the key policy rates unchanged in its October policy. In its fourth bi-monthly policy statement of 2021-22, the MPC projected Consumer Price Index-based inflation at 4.5% for the Oct-Dec period.
The RBI also said that it will maintain the accommodative stance on rates as long as needed. A long pause on rates brings uncertainty to the fixed income funds.
Here’s what top mutual fund managers had to say about the RBI policy.
Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund
Given the recent RBI market actions, the outcome of the Policy was along expected lines with the central bank continuing its hesitant steps towards normalization of liquidity.
In this endeavour the GSAP auction as expected was the first casualty with the RBI not announcing any incremental GSAP. At the same time, the Governor’s statement attempted to soothe markets by not projecting any of these measures as the unwinding of accommodation and promising measures such as OMO/Twist/GSAP If market conditions warrant.
While additional measures to absorb liquidity under 14D VRRR have been announced along with additional 28D VRRR as and when required, the measures taken currently do not address a durable absorption of the quantum of surplus liquidity.
In the absence of durable absorption, it is unlikely that the short end rates would directionally move closer to the policy rates. Market direction is expected to remain volatile as the overhang of additional measures would remain.
Even as the near-term domestic CPI prints may provide some relief, external factors such as commodity prices and the unwinding of monetary accommodation globally could counterbalance that.
Vikas Garg – Head Fixed Income at Invesco Mutual Fund
“Don’t rock the boat when it is close to the Shore, there is a life beyond” says it all. MPC policy re-assures on the same – Continuation of monetary policy support to ensure growth revival in a sustainable way as moderation in inflation helps.
We believe the direction is – “Repo Rate lower for Longer, coupled with a gradual policy normalization in a non-disruptive way through further liquidity recalibration & narrowing of policy rate corridor most likely by early next year”
Pankaj Pathak, Fund Manager-Fixed Income, Quantum Mutual Fund
For all practical purposes, so much was expected from this policy, but the RBI maintains the status quo in its monetary policy announcement. The Repo rate is unchanged at 4%, the reverse repo rate remains at 3.35% and the monetary policy stance remains accommodative. The governor though called it gradualism and not wanting to rock the boat.
This is at a time when oil prices, India’s bugbear looks ominous; global demand leading to supply shortages and prices are rising for a variety of items and at a time when ground-level inflation seems higher than reported inflation.
We felt the RBI could have at least guided the markets, that rates will be raised in the months to come. The RBI’s efforts to suck out and manage the excess liquidity is 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 background of high oil prices and rising US treasury yields, the removal of G-SAP should lead to a rise in long-term bond yields. Investors in long-term debt funds should expect higher volatility and lower returns.
Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund
At today’s bi-monthly MPC meeting, the MPC voted 5:1 in maintaining the accommodative stance and unanimously (6-0) to keep the key rates unchanged.
Maintaining a neutral tone, and avoiding any surprises, RBI sounded comfortable with the ongoing growth-inflation dynamics. CPI inflation for FY 22 was lowered sharply (by 40 bps) to 5.3% from 5.7% earlier, recognising the slowing monthly momentum of price increases and a favourable base effect in the coming months. The growth forecast for FY 22 has been left unchanged at 9.5%.
As expected, the policy narrative centered around steps to withdraw the excess liquidity which is now in excess of INR 12 trillion.
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 the ongoing Rs 4 trillion to INR 6 trillion (by December 3rd). Besides, a new 28-day VRRR is likely to be introduced if the need arises. Even after the additional liquidity suction, RBI estimates liquidity surplus under the fixed-rate reverse repo at INR 2.5 to 3 trillion.
Importantly, G-Sec Acquisition Programme (G SAP) is being discontinued given the reasonable anchoring in long-end yields that has been achieved and the substantial liquidity of INR 2.37 trillion already injected in the first half of the current fiscal (under G SAP and OMOs) as against Rs 3.1 trillion for full FY 2021.
Despite the partial steps initiated to lower support for bonds and the liquidity moderation measures, RBI reiterated its readiness to act if the need arose.
Today’s steps are likely to lead to a further flattening in the yield curve as the short end reacts to a gradual liquidity withdrawal over time.
