Rbi alludes to the standardization of policies. What does this mean for debt market investors?
The RBI’s policy approach in the first fortnightly monetary policy for FY23 is hawkish. Current monetary policy is expected due to inflationary pressures globally. However, after this RBI policy, bond yields are still expected to rise stubbornly.
In the April 2022 Monetary Policy, the RBI keeps the Repo Rate unchanged at 4%, while the Marginal Standing Facility (MSF) Rate and Bank Rate also remained unchanged at 4.25% . However, maintaining its approach to liquidity adjustment facilities, i.e. the normalization of the LAF corridor, the central bank has introduced a standing deposit facility (SDF) rate, which will now be the floor of the corridor LAF, at 3.75%.
Additionally, among its key developments, RBI has increased the limit in the Held-to-Maturity (HTM) category from 22% to 23% of NDTL until March 31, 2023. manage their investment portfolio in 2022-23.
Additionally, RBI has decided to allow banks to include eligible SLR securities acquired between April 1, 2022 and March 31, 2023 under this enhanced limit. HTM limits would be reinstated from 23% to 19.5% on a phased basis beginning with the quarter ending June 30, 2023.
Prashant Pimple, Managing Director and Chief Investment Officer – Debt, JM Financial Asset Management, said: “The hold-to-maturity (HTM) limit for banks is increased by 1% until March 31, 2023, with the intention to support public borrowing for this financial debt The political corridor has been normalized through the SDF and the MSF No clarity on the absolute quantum of open market operations has acted against the Gsecs, the benchmark over 10 years exceeding 7%, after the policy.
Abheek Barua, Chief Economist, HDFC Bank, said: “The RBI has responded to both new inflation and growth challenges that have emerged due to geopolitical tensions manifested in rising commodity prices. raw materials. While the RBI kept its monetary policy unchanged, it restored the political corridor to pre-pandemic levels and provided a commitment to a slow reduction in liquidity going forward.”
“This is clearly a hawkish policy compared to the February meeting, justified by the inflationary pressures that have emerged over the past month. The upward revision of the inflation forecast by 120 basis points to 5 .7% for FY23 seems reasonable given the widespread nature of price increases,” Barua added.
According to RBI, in its policy on bond yields, several central banks, especially systemic ones, continue to be on the path to normalizing and tightening monetary policy guidance. As a result, sovereign bond yields in major emerging economies have tightened. Bullion prices had hit near-2020 highs on safe-haven inflows, with a recent correction as bond yields rose.
RBI went on to explain that global stock markets have fallen, although more recently they have recovered some ground. In recent weeks, strong capital outflows from EMEs have moderated, limiting downward pressure on their currencies, even as the US dollar has strengthened.
“Overall, the global economy is facing major headwinds on multiple fronts, including continued uncertainty about the trajectory of the pandemic,” RBI said in its policy statement.
Going forward, Barua said, “Despite the increase in HTM limits, bond yields are expected to rise given the sheer size of the borrowing program for FY23. We expect the 10-year to rise to 7- 7.25% in the first half of 23.”
On inflation, RBI expects the consumer price index to stand at 5.7% in 2022-23, with Q1 at 6.3%; T2 at 5.8%; T3 at 5.4%; and Q4 at 5.1%. While real GDP growth for 2022-23 is now projected at 7.2%, with Q1 at 16.2%; T2 at 6.2%; T3 at 4.1%; and T4 at 4%, with broadly balanced risks.
Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said: “Recognizing the new reality of war-triggered crude surge, the RBI, as expected, has reduced the GDP growth rate projection for fiscal year 23 to 7.2% from 7.8% earlier and lifted the CPI. inflation projection for FY23 at 5.7% vs. 4.5% earlier. This is based on the assumption of a crude at $100. This implies that growth and inflation may be better if crude drops sharply if the war ends hopefully early. The reverse may be true if the war escalates and crude climbs well above $100.”
“The MPC’s decision to maintain its status quo is in line with expectations. RBI has emphasized strong foreign exchange reserve buffers, which can act as a cushion amid geopolitical tensions and exchange rate volatility” , said Shivam Bajaj, founder and CEO of Avener Capital. added, “The market’s reaction to the downward revision of the growth rate to 7.2% and the upward revision of the inflation rate to 5.7% is one to watch. It will also be interesting to see how the economy tackles its supply- related constraints to mitigate inflationary pressures.
Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund, said: “RBI continues to chart a course diametrically opposed to what most central banks have done. A status quo on rates and guidance was accompanied by the statement of the governor who continued to emphasize continued political support to ensure broad and sustainable growth, as well as continued reference to the impact of the pandemic.A few procedural changes to the liquidity framework were only accompanied by no clear guidance on the outcome of sustainable liquidity.
Radhakrishnan added: “Although the short-term impact has been an easing of rates with a curve steepening bias, the continued reluctance to recognize change, in the context of changing momentum both at the global level and with the resumption of domestic growth, remains surprising.In this context, continued volatility in market rates remains the base case as there does not appear to be a clear fundamental reason to validate lower rates, at except for a continued dovish attitude and the absence of preemptive actions to normalize central bank policy.”
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