Key highlights of monetary policy:
• In line with our expectations, the RBI cut the repo rate by 25 bps to 6.0%
• The Monetary Policy Committee (MPC) voted 4:2 in favour of the 25 bps rate cut
• The stance of the policy was kept unchanged to “neutral”
• The RBI revised down its projections for both growth and inflation
• In order to ease liquidity pressures, the RBI announced an increase in the facility to avail liquidity coverage ratio (FALLCR)
The intention of the MPC is to get all the engines of the economy to start functioning. This is reflected in the statement “the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish”. Thus, the focus of RBI is to see, actions taken earlier making their way into the real economy through lower cost of funds.
RBI has taken several steps since the inception of the new Governor, like two rate cuts of 25 bps each, OMO purchases of close to INR 3 trillion as well as further liquidity tools like FX swaps. The intention is to provide liquidity to the banking system to get the flow of capital to all sections of the economy.
The RBI has highlighted in the policy their resolve to maintain price stability with an eye to get growth back on track. Going forward, RBI has kept the space open for a further rate cut of 25 bps but it would be data dependent over inflation trajectory, normal monsoons and fiscal health.
We expect the spreads to widen in the duration part of the yield curve as with lower chance of OMOs and heavy supply via the government borrowing plan. The market is expected to be concerned over the demand supply mismatch and thus we expect the 10 year to remain elevated at around 7.35 -7.45%.
The constant remains that RBI will focus on the banking system liquidity and thus investors could consider to stay invested in the shorter end of the curve.
Source: RBI, Bloomberg. Data as of April 04, 2019
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