Avnish Jain, Head of Fixed Income, Canara Robeco Asset Management Company
The last Monetary Policy Committee (MPC) for fiscal 2021 was on expected lines, as it endeavours to provide support to economy recovering from ravages of COVID pandemic.
Rates were left unchanged with repo rate @ 4% and reverse repo @3.35%. The MPC also continued with its accommodative stance for as long as necessary i.e. “at least during the current financial year and into the next financial year” to revive economic growth. On growth, the MPC expects growth to clock 10.5% in FY2022. The committee noted that “rural demand is likely to remain resilient on good prospects of agriculture. Urban demand and demand for contact-intensive services is expected to strengthen with the substantial fall in COVID-19 cases and the spread of vaccination.” The MPC expects that the Union Budget with focus on health and infrastructure should continue to accelerate economic growth.
On inflation, the MPC noted that due to sharp fall in vegetable prices a benign outlook is seen. However price pressure persists in some items like pulses, oils and spices. Further there could be cost pressures from higher input prices in industrial raw materials as well strengthening crude prices. Hence the committee projects CPI to be around 5-5.2% in 1HFY2022 and 4.3% in Q3FY2022.
Overall, while the policy is dovish, the inflation projections continue to remain over 4% in FY2022, indicating that, now, there is no room for easing. RBI is likely to remain on pause mode for most of FY2022. Good economic recovery further supports this view. CRR will be restored to 4% in 2 phases, indicating RBI’s intention of removing excess liquidity whilst maintaining sufficient surplus liquidity. This may push shorter terms rates higher.
Market expected RBI to announce some measures to support bond markets in face of higher borrowings pursuant to an expansionary budget. While RBI assured that government borrowings are likely to be managed without disruptions, lack of any immediate action led to market selloff. While RBI gave dispensation for higher HTM of 22% till March 2023, this is likely to provide only nominal support to market. 10Y yield which was around 6.05% before the policy, rose to 6.15% before retracing some of the losses.
Overall the pressure of borrowings is likely to continue to pressurise yields. Active intervention from RBI may be required to keep a lid on yields. RBI is likely to support the borrowing through maintaining surplus liquidity whilst keeping repo rate on hold. In the short term 10Y G-sec may trade in a range of 6-6.25%. (Share Manthan, February 05, 2021)
