RBI Monetary Policy: Trend of lower yields to continue

There were hardly any surprises in the RBI Monetary policy today. The rates and stance remained unchanged, and so did the voting pattern of the MPC. To be sure, this was expected to be an uneventful MPC. Since the last MPC the data hasn’t changed much. We have witnessed hardening of oil prices, but the rise is not material enough to warrant an RBI reaction. Especially as past few months have seen softer core inflation.

There were hardly any changes in the projection of inflation (mildly lower than past projections). Even the growth projections were largely unsurprising. The unchanged projections confirm that there are currently no surprises in the economy, and India is growing at an expected pace.

It was interesting that RBI did not reaffirm the worry on “last mile” of inflation fight. This echoes US Fed’s words as even the FOMC is grappling with this “last mile”. We believe that the data in US, and in India remains similar – a robust growth, coupled with inflation that has fallen significantly – but still not to target levels. Unsurprisingly, the central banks have similar outlook.

Going forward, we believe that the trajectory of the rate cuts would also be intertwined. It is unlikely that the RBI would start rate cuts before the Fed signals a dovish policy. After all, the rupee volatility still remains a worry, not withstanding record RBI FX reserves.

We expect short term volatility in the markets as (i) the new HTM policy for banks are implemented, (ii) RBI clarifies its LCR guidelines which Gov Das mentioned today, and (iii) US yields continue their roller coaster ride.
However, in medium term we expect the demand for Indian bonds to remain robust. The inflows from JP Morgan index inclusion will provide further impetus.

Thus, in such a scenario, we prefer to buy longer duration bonds. While we are cognizant that the markets may display volatility, the trend of lower yields should continue going forward after April MPC, albeit with some road bumps.

Sandeep Yadav is Head - Fixed Income at DSP Mutual Fund.

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