As widely expected, the Reserve Bank of India's monetary policy committee (MPC) maintained a status quo on benchmark rates. The MPC reiterated its accommodative stance would continue as long as was necessary to revive and sustain growth on a durable basis and to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remained within the target range.
While nothing material was expected in the RBI’s policy, it was centered around G (Growth) and G (GSAP). The MPC lowered its projection of FY22 real GDP growth to 9.5 percent (10.5 percent earlier). It said while rural demand remained strong and the expected normal monsoon bode well for sustaining its buoyancy, the increased spread of COVID-19 in rural areas posed a downside risk. CPI inflation forecasts were raised marginally to 5.1 percent for FY 2022, with risks broadly balanced.
The G-SAP was the other relevant announcement. There is no doubt that G-SAP 1.0 has been instrumental in orderly movement in yields despite week- on-week auction supply. The RBI has earmarked some amount (Rs 100 billion) for SDLs (state development loans) in the remainder of G-SAP 1.0 (Rs 400 billion).
It also announced G-SAP 2.0 for Q2 FY2022 for an amount of Rs 1.2 trillion. These steps will go a long way in bolstering support for bond yields in the weeks ahead. We also saw the announcement of special liquidity facility of Rs 160 billion to SIDBI to meet MSMEs’ short- and medium-term credit needs to kick start the investment cycle.
On-tap liquidity window of Rs 150 billion was announced for contact-intensive sectors (hotels, restaurants, spas, tourism among others) via banks, with tenors of up to three years till March 31, 2022.
It is clear from the measures that RBI may want to leave no stone unturned to pump prime growth at the earliest. The nationwide vaccination drive does offer some solace to aid this recovery and induce unlock phases for impacted states.
Looking ahead
We are of the view that accommodative bias remains, with a low probability of rate normalisation in near future. The inclusion of SDLs in the remainder of G-SAP 1.0 is a good move to aid state development loans (SDL) yields to stabilize. The expectation for SDL inclusion in GSAP 2.0 is hence realistic.
This may however mean a lesser amount of G-SAP for the central government. We may therefore see Gsec yields oscillating between bond supply via auction and demand via GSAP. Bond markets may be reminded of the popular Bollywood dialogue by Ajit - “Liquid ise jeene nahi dega, Oxygen ise marne nahe dega.” Extending that to bond markets, “GSAP yield ko upar jaane nahi dega, aur auction yield ko neeche aane nahi dega!”
A spike in yield could provide protection from RBI, yield fall could see market participants wanting to take profits, making carry trades more relevant.
We see no material change in our fixed income investment outlook—chase the carry —focus on quality. Low to moderate duration strategies within fixed income could be reasonably anchored due to the dual comfort of liquidity and rate outlook.
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