Hint of hawkishness in RBI's tone on future actions
PremiumGrowth may trend slightly below RBI projections due to lingering pressures
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PremiumAfter a pro-growth and fiscally conscious budget, the Reserve Bank of India (RBI) has backed the government with a market consensus policy announcement. The monetary policy committee on Wednesday decided to raise policy rates by 25 basis points, in line with market expectations. According to governor Shaktikanta Das, the RBI has three simultaneous targets—to keep inflation expectations anchored; break core inflation persistence; and contain the second-order effects of inflation.
The governor said the global economic outlook improved from a few months ago. Growth prospects improved in major economies. While inflation is on a descent, it is well above the target in major economies. Uncertainties and risks in the external sector warrant a keen eye from a policy standpoint. RBI reviewed its estimates for inflation and growth. While inflation, especially core inflation, remains elevated, RBI has built in some degree of buffer, estimating crude prices for the year at $95/barrel. Currently, the India crude basket hovers at $83/barrel. Despite the optimism, the governor’s words should be read closely: “We need to see a decisive moderation in inflation. We have to remain unwavering in our commitment to bring down inflation. Thus, monetary policy has to be tailored to ensure a durable disinflation process."
The line, along with the conservatism on guidance for both GDP and inflation, indicates a hint of hawkishness in the tone of future policy actions. On the positive side, with the rate hike and inflation estimates, RBI has finally achieved real positive rates in India, which is good news for savers in India’s debt markets. Basis policy rates at 6.50% and RBI’s CPI inflation estimate for FY24 at 5.3%, real positive rate now stands at 120bps.The current yield curve presents opportunities for investors in the short-to-medium term. Those with investment horizons of above three years, incremental allocations to duration may offer significant risk reward opportunities. Those with short-term horizons (six months to two years) money market strategies continue to remain attractive, offering competitive ‘carry’ and low volatility.
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The policy caps a busy week for debt market participants as it digests the budget, the US Fed and other central bank actions. Going forward, markets should operate with normalcy. Market reaction may react to the possibility of further reduction of system liquidity driven by redemption of LTRO & T-LTRO securities due in February and April. The curve has moved higher by 5-7 bps.We believe RBI is focused on bringing down inflation and even remains cautious of markets getting over-optimistic. While our call for lower inflation for the next year stands, our call to action on portfolios will be driven by high-frequency data and the actual inflation prints as they are released.
Growth may trend slightly below RBI projections due to lingering pressures from the base effect and external factors, but we remain constructive from a medium-term perspective, as the overall Indian economy is backed by domestic spending and government capex. While we believe we are at the peak of policy rates, inflation and the US Fed action can be wild cards for market participants.
R Sivakumar, Head Fixed Income, Axis Mutual Fund
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