View on the RBI Policy by Mr. Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund.
The MPC voted unanimously (6-0) to maintain key rates unchanged at the third bi monthly monetary policy. Through a 5-1 vote, the MPC also agreed to continue the “accommodative stance” for as long as necessary to revive and sustain growth on a durable basis.
RBI upped its CPI target for the year to 5.7% from 5.1% earlier, acknowledging price pressures emanating both from exogenous supply side shocks such as a pick up in raw material prices (commodities – metals, crude) and higher logistics costs and shortages (chips). It was quick to add that it believed inflation spike to be transitory as the economy goes through an adjustment phase and hence preferred to largely see through these numbers.
RBI proposed some normalisation on liquidity to drain out part of the surplus liquidity which is topping INR 8 trillion. Variable rate reverse repos (VRRR) are proposed to be doubled from the present INR 2 trillion to INR 4 trillion over the next month while keeping the tenor unchanged at 14 days. RBI was quick to add that this should not be construed as tightening as VRR liquidity is part of overall system liquidity and was meant to moderate daily liquidity while compensating banks a little more through this route.
While we see the policy as “supportive” and the commentary as reasonably dovish, the less than unanimous vote for an accommodative stance, higher VRRR amounts and raising of inflation forecasts, signal some emerging concerns within the Central bank at the margins.
In this backdrop, we would continue focusing on the Banking & PSU, Corporate bond and Dynamic Bond fund categories, post today’s policy.