Mutual fund managers react to RBI status quo on rates

In line with market expectations, the RBI maintained the status quo on policy rates and also decided to maintain a dovish stance on rates. The central bank kept the repo rate unchanged at 4% for the 11th consecutive time. The repo rate also remained unchanged at 3.35%. Here’s what top debt fund managers had to say about the policy:

Mahendra Jajoo, CIO, Fixed Income, Mirae Asset Investment Managers:
Considering the changing global monetary policy and geopolitical situation, since the last monetary policy, RBI has activated the special tailor-made sunset clause during the covid period. The recent spike in food, fertilizer, energy and other commodity prices due to ongoing geopolitical conflicts has led to a massive upward revision of inflation projections for FY23-5, 70% now versus 4.50% at the previous meeting. While growth projections have also been revised down from 7.8% to 7.2%, the focus is now on pre-emptive action against any possible spike in inflation expectations. After exemplary handling of covid-related disruptions over the past two years, RBI is once again seen acting at just the right time on a forward-looking approach to halt inflationary pressures.

Although the market has already priced in some of the current metrics, the normalization of policy will likely drive yields higher again. Given a large borrowing program, policy interventions at appropriate times would likely ensure a non-disruptive and orderly movement of the yield curve in the future

Puneet Pal, Head-Fixed Income, PGIM India MF:
RBI begins the normalization of monetary policy by introducing the SDF (Standing Deposit Facility) as a floor for its operations in the money market or Liquidity Adjustment Facility (LAF) at 3.75%. RBI raised its inflation forecast to 5.70%, which is higher than the market expected. They also cut the growth forecast to 7.20% while increasing the hold-to-maturity (HTM) for banks to 23% through March 2023. We view this policy as hawkish relative to market expectations. market and we expect yields to drift higher across the curve. We expect the curve to flatten going forward, but given the uncertain and volatile times, investors are sticking to low duration funds.

Pankaj Pathak, Fund Manager, Fixed Income, Quantum AMC

We had called the February policy ‘unnecessarily accommodative’ – in which the RBI forecast CPI for FY23 at 4.5% well below forecasts, allowing them to continue their accommodation and maintain the status quo. In his April policy, given his revised inflation forecast of 5.7% for FY23, he turned what the market would call an “unexpected hawkish”.

In its inimitable way under Governor Das, the RBI shifted its stance away from accommodation without really calling it that, did an effective rate hike of 40 basis points without actually raising rates, and introduced a tool (Special Deposit Facility-SDF) to sterilize unlimited excess liquidity but choosing to do so over a multi-year horizon.

The average CPI of 5.7% for FY23, with the first two quarters above 6%, would mean that the RBI can no longer hold the Repo rate at 4%. We expect a change in position and a rise of 25 bps in June. Politics. If the current conditions of oil at $100/brl and high food prices continue, we expect the Repo rate to be around 5% in FY23.

Worry for equity markets would be the sharp downward revision to GDP forecasts, especially the below-consensus figures for the third and fourth quarters of FY22.

Bond markets reacted to the unexpected aggressiveness and shift in focus to excessive inflation growth. Yields rose 10 to 15 basis points across the curve. Oil prices, US bond yields and the RBI’s focus on inflation will be the main drivers for bond markets. Given the ample supply of government bonds and the virtual absence of OMO, we expect bond yields across the curve to rise over the next six months.

Murthy Nagarajan, Head of Fixed Income, Tata Mutual Fund:

RBI prioritized CPI inflation over growth. This is a big change as RBI has prioritized growth over CPI inflation. RBI has raised the CPI inflation forecast to 5.7% from 4.5% as stated in the February 2022 monetary policy. RBI has introduced a standing unsecured liquidity facility at 3.75% to absorb excess liquidity in the system throughout the day. The next steps expected from the RBI are to move the Repo rate and bring it closer to CPI inflation over a period of time. Repo rate hikes are expected to start from August 2022 policy. However, RBI said the stance remains dovish and the withdrawal of liquidity from the system will be over a multi-year period. GDP growth was lowered to 7.2% from 7.8% announced in the February policy. Banks’ HTM limits have been raised from 22-23% through March 2023. Given weak credit growth, the ten-years are expected to trade in a range of 7.05-7.30% in the coming months. to come.

Sandeep Bagla, CEO, TRUST Mutual Fund:
“In response to complex market conditions, RBI/MPC has crafted a fairly complex monetary policy. The stance remains dovish, but less dovish than before, but effective rates have been raised by 25-40 basis points. Markets have yet to stabilize subtle shifts in complex policy reacted negatively, with 10-year yields crossing the 7% mark, jumping 10-12bps The huge borrowing program starting today should help the curve Inflation projections one year ahead have been raised from 4.5% to 5.7% This will encourage long-term bond yields to rise significantly from here. Banks linked to repo rates may not be raised, but the cost of funds will certainly increase. Overall, a complex policy with a simple message of higher rates.”

Dolores W. Simon