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RBI maintained the status quo in terms of policy direction and highlighted growth moderation in certain industrial sectors, liquidity management and possible upward inflationary risks.
This comes amidst increased monetary easing amongst central banks in developed markets in order to alleviate concerns about economic slowdown and credit market crunch.
The US Federal Reserve had announced a sharp 75 bps rate cut ahead of its policy meeting tomorrow and Bank of Canada followed suit. The European Central Bank has left ratesunchanged and rate direction in Japan appears to have reversed on growth concerns.
On the other hand, People’s Bank of China continued with its monetary tightening to counter inflationary pressures and high asset prices through rate hikes and increased reserve requirements.
In India, liquidity conditions had tightened in recent months due to CRR hikes, MSS auctions and outflows towards equity issuances. This led to RBI infusing liquidity through repo auctions.
The macro environment remains conducive for debt markets, with RBI achieving its objective of moderating inflation and credit growth, without hampering the economic growth momentum.
The maintenance of policy direction resulted in weakening of investor sentiment and yields moved up across the curve.
Given the continued strong economic growth, possible demand pressures also appear to have been a key factor in this policy review. While rate differentials would ideally result in additional capital flows, increasing risk averseness amongst global investors could temper the momentum.
We expect the central bank to maintain a neutral policy stance and interest rates to have a downward bias, going ahead. The cautious tone appears to be due to the global uncertainty and possible inflation pressures due to food items and global commodity prices.
But RBI could announce appropriate measures if growth momentum gets impacted due to international/domestic factors. Investors with appropriate risk profile can look to get invested in long bond funds and short term income plans continue to be attractive investment avenues, keeping in mind the medium term rate outlook.
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