RBI's Monetary Policy Review
“MEASURED, BALANCED AND OPTIMISTIC"
MPC has voted in majority (4 out of 6) for no change in rate – repo rate at 6.5 pc and 4 out of 6 members voted to remain focused on withdrawal of accommodation stance to ensure inflation progressively aligns to the target. Uncertainties in food prices would continue to weigh on the headline inflation trajectory (MoM change in headline CPI for April'24 rose by 0.5%, the highest print since Nov'23, driven by food and beverage prices). Nimble and flexible management of liquidity conditions would continue to align inflation at the targeted level of 4 pc.
Dolat Capital ’s View
Overall the policy announcements are on expected lines. Concerns around food inflation are reiterated. The recent rise in industrial metal prices also earns close attention as it may get passed to the consumers. Buoyancy around economic growth (Real GDP growth of 8.2% vs. 7.6% est. by NSO in FY24) gives a window of opportunity to the MPC to evaluate developments around geopolitics, budget 2024 and monsoon, before the committee gets into the easing cycle. Probable time for the first-rate cut in Oct’24 policy meeting. Risks to rate cut expectation are factors like rise in commodity, food prices and adoption of populist measures which could be inflationary in nature.
View on Fixed Income
Due to unexpected election results, the recent rise in bond yields has been fuelled by concerns over potential fiscal loosening, driven by the demands of a coalition government. Though, Fiscal discipline has been a key feature of recent budget announcements, making any reversal from this trend is unlikely due to the significant macroeconomic implications.
The outlook on liquidity dynamics is significantly improving due to improvement in government spending, the seasonal reduction in Currency in Circulation (CIC), and anticipated inflows from index funds in the coming months. As clarity on liquidity dynamics emerges, the elevated levels at the front end of the yield curve are expected to decline, enhancing the risk-reward ratio for investments in the shorter segment (up to 5 years) of the curve. While we anticipate an overall downward trend in yields, the longer end of the yield curve is poised for superior performance over the medium term as we expect rate cut to start coming down towards the end of the year. Therefore, investors should focus more on the longer end of the yield curve and consider using a barbell strategy, pairing short-term bonds with long-term bonds. The risks to this outlook include the potential postponement of interest rate cuts until next year, persistent concerns about food inflation and commodity prices, and the implementation of populist measures that could be inflationary in nature. Investors are encouraged to tailor the duration of their investments based on their risk appetite and prioritize quality bonds.
Purvag ShahDinesh GiridharAmit KhuranaSurya SaikumarSheetal KubadiaRayes EfthieNishant G
