Avnish Jain
Head of Fixed Income, Canara Robeco Asset Management Company
The monetary policy committee (MPC) maintained status quo on rates in August policy, as inflation surprised on upside and the MPC gave due weightage on its mandate on medium term inflation target.
While the MPC expects the growth to contract in FY2021, the Governor noted that there was good transmission on past policy cuts and liquidity operations in terms of sharp fall in rates for money market and corporate bonds, with NBFC also able to take advantage of the low rate scenario and hence a pause at this juncture is justified. The MPC expects the inflation to fall in the 2HFY2021.
The Governor noted that there was policy space for further easing but must be used judiciously indicating the pace of rate cuts as well quantum of cuts are likely to be lower in the future. In terms of non monetary actions, RBI provided for restructuring of some lender loans (hit by COVID pandemic) with many safeguards.
Market yields rose on rate status quo as well as no RBI action on further liquidity measures to support market with the 10Y rising by ~5 bps. Market was not expecting any rate cut and hence the sell-off was limited. Market yields may inch up a little in near term.
However RBI has done ad-hoc OMO purchase / “twist” operations whenever yields have gone up and hence market participants would be wary of the same. Markets may remain in a narrow trading zone, as future policy action is not ruled out. We expect 10Y to remain within 5.75-5.95% range. (Share Manthan, 6th August 2020)
