The system liquidity is expected to ease as the government resumes spending
Parijat Agrawal, Head – Fixed Income at Union Mutual Fund
FinTech BizNews Service
Mumbai, June 7, 2024: Shaktikanta Das, Governor, the Reserve Bank of India, gave a statement today following MPC meeting. Decisions and Deliberations of the Monetary Policy Committee (MPC) have bearing upon various aspects of lending, investment, saving, digital & IT, Banking liquidity, FPIs inflows etc. Let’s know what are the views of experts from MFs, AMCs, Financial Services providers, etc.
Focus on price stability
Parijat Agrawal, Head – Fixed Income at Union Mutual Fund: As expected, the Monetary Policy Committee (MPC) kept the policy rate and stance unchanged, however the split of 4-2 increases the probability of rate cut by the fourth quarter of this fiscal. The policy is clearly focused on price stability to bring headline CPI inflation to 4% on a durable basis. Resilient growth, upgrade in fiscal 2025 GDP projection to 7.2%, volatile food and commodity prices, budgetary announcements would keep the MPC on wait and watch mode for further data. The system liquidity is expected to ease as the government resumes spending.”
Future course of liquidity management will change
Sandeep Yadav, Head - Fixed Income, DSP Mutual Fund: The monetary policy did not throw any surprises, evidenced from the muted market reaction. However, there were three things that came out. Unlike previous times, the rate pause was not a unanimous decision with two members calling for a rate cut. While it doesn’t mean that we expect a rate cut in next policy, it shows that RBI is gradually moving towards a rate cut regime. RBI has also clearly disassociated their rate actions from the US FED. While RBI does look at domestic compulsions before taking rate decisions, it has to also look at the collateral damage of the currency - just like any other EM central bank. This is prudent, and we believe RBI has been following it - and will probably follow it when it cuts the rates. RBI mentioned that they prefer to keep overnight rate close to repo rate. This seems at odds with the data from past year. Many times, the overnight rate has diverged from Repo, and it probably was through RBI's intent via VRR and VRRR. Thus, by today's statement we believe that the future course of liquidity management will change, and RBI may keep overnight rate at Repo rate.
FPIs will continue to be net buyers of fixed income in near term as well
Lakshmi Iyer, CEO-Investment & Strategy, Kotak Alternate Asset Managers: The policy maintained status quo was pretty much expected. The vote is now 4-2 compare to 5-1 in the earlier policy. Disinflation seems to be the word for now and food inflation could be the party spoiler in this process. What is encouraging to see is that global central banks have started easing rates, ECB and bank of Canada among the recent ones. FPIs in our view will continue to be net buyers of fixed income in near term as well. While rate cut is still some time away, we remain constructive on interest rates and expect 10 year Gsec bond yield to gradually ease in coming months.
Possibility of more members in MPC turning dovish
Siddharth Chaudhury, Senior Fund Manager, Fixed Income, Bajaj Finserv Asset Management: Today’s MPC meeting’s outcome is largely in line with market expectations. The upward revision in real GDP growth projection by 20 bps though wasn’t largely expected by market but given the momentum in recent quarters it doesn’t come as a big surprise. Also, note we now have one more MPC member in dissent voting for 25 bps rate cut along with change in stance to neutral.
The RBI’s policy rate of 6.5% amounts to a real policy rate of 2%, based on the central bank’s year-ahead inflation projection. The neutral real policy rate can be estimated as being in the 1.0%-1.5% range. The real policy rate facing the industrial sector is even higher. This creates the possibility of more members in MPC turning dovish in coming months barring any food inflation shock or big change in Fiscal policy (watch out for Final Budget FY 2025).
Positive sentiment expected to continue for debt market
Vikas Garg - Head of Fixed Income, Invesco Mutual Fund: Non-event policy as MPC maintained status quo on policy rates & stance as “withdrawal of accommodation”. More MPC split appears with 4:2 vote, indicating moving closer to rate cut. Growth – inflation dynamics remains favorable as GDP for FY25 upped to 7.2% with average inflation maintained at 4.5%. Strength on external stability & importance of domestic factors for MPC emphasized again. No mention on surprise outcome of General elections & robust commentary on growth indicates RBI’s comfort on continuation of Government policies. Active liquidity management to continue. Overall, a very balanced policy. Banking liquidity is expected to turn surplus in June/July with Govt spending post elections and FPIs inflows in debt segment. Market focus will be now on new Government’s fiscal policies. For now, we expect positive sentiment to continue for debt market driven by favorable demand-supply dynamics.
Normal monsoon should boost agricultural activities, cooling down inflation further
Kartik Jain, MD & CEO at Shriram AMC: We had expected RBI to keep interest rates unchanged. Domestic economy is on a growth path as FY24 GDP came in at 8.2%, better than estimates. Recovery is witnessed in all spheres – private consumption, investment activities and exports. Although India’s retail inflation eased to 4.83% in April 2024, an 11-month low, it is still higher than the targeted range. Normal monsoon should boost agricultural activities thereby cooling down inflation further. Moreover, the RBI will also monitor closely the policy decisions adopted by the new coalition government at the Centre and its impact on the domestic economy. RBI will resort to any rate reduction only when there is increasing comfort on the inflation outlook (targeted range of 4.5%) or if Fed cuts interest rates.
Local weather and pitch gives more elbow room to tackle inflation
Siddarth Bhamre, Head Of Research at Asit C. Mehta Investment Interrmediates: RBI has revised India’s GDP growth forecast for FY25 to 7.2% from 7.0% while inflation forecast remains unchanged at 4.5%. On inflation front the Governor stated that disinflation in fuel is supportive but food inflation to remain bit volatile. Increase in private consumption, healthy government and corporate balance sheet and improved asset quality in banking system are growth positive. Forecast of above normal monsoon which will boost kharif production and increase in buffer stock may keep food inflation in check.
Our biggest take away from this monetary policy is governor’s statement related to guiding principle of RBI which is ‘follow the Fed’. He mentioned that actions of RBI will be determined mainly by domestic growth-inflation outlook. So, with GDP growth revised upwards and inflation under control, is there a need to reduce interest rates even if FED reduces its rates in near future? Or should we not reduce interest rates and further increase our growth even if FED plays wait and watch game? In either case, our economy is on strong footing for sustainable economic growth.
