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Key highlights of monetary policy: | BNP Paribas Mutual Fund

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

Disclaimers: The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but BNP Paribas Asset Management India Private Limited (BNPPAMIPL) makes no representation that it is accurate or complete. BNPPAMIPL has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. These forward looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. BNPPAMIPL undertakes no obligation to update forward-looking statements to re­flect events or circumstances after the date thereof. The words like believe/belief are independent perception of the Fund Manager and do not construe as opinion or advise. This information is not intended to be an offer to sell or a solicitation for the purchase or sale of any financial product or instrument. The information should not be construed as an investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The sector(s) mentioned in this document do not constitute any recommendation of the same and BNP Paribas Mutual Fund may or may not have any future position in these sector(s). The Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.

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