By Nilesh Shah
The RBI has finally bitten the bullet towards change in policy stance by being “less accommodative” even as it kept the policy repo rate unchanged with a unanimous vote. They have managed this by introducing a new tool SDF (standing deposit facility) as means to manage liquidity more efficiently. The RBI has also maintained that they will continue to have a nuanced and nimble approach to liquidity management even as they move towards normalisation going ahead. We have for long been arguing for a case to narrow the corridor between repo and reverse repos to pre pandemic levels. By introduction of SDF, the RBI has just done that – a move which has led to 40 bps rise in overnight rates. Also, usage of SDF as a tool offers more flexibility to RBI as they do not need to place collateral every time they drain out liquidity. We however expect the transition from ~INR 8.5 tn liquidity to ~INR 2 tn (pre pandemic level) liquidity to be a gradual one.
The inflation (read CPI) forecast has been revised higher from 4.5% to 5.7%. Also, growth outlook has been lowered from 7.80% to 7.20% for FY 2023. This unambiguously articulates RBIs preference to sequence inflation over growth in its priority list. This is in line with global central banks narrative as well. There is a lingering concern that inflation could be more broad-based and relatively sticky – a case which has got further accentuated post outbreak of war. All this comes with an assumption of $100 on crude oil prices. Of course the swing could be either ways, but non fuel items too have displayed stellar price gains bolstering case to remain cautious on inflation front
The policy has clearly shifted gear from being dovish to a more hawkish guidance and undertone. The accommodative stance is now geared towards being withdrawn to ensure inflation remains within target. Markets will now start discounting rate hikes at the earliest – though there is no sense of urgency displayed by RBI to hike rates.
The RBI also remains non-committal on their plans to ensure orderly evolution of the yield curve (no OMO/OT etc on the radar for now) – not a very happy situation given weekly government bond supply and tepid demand. Hence, we expect 10 year g-sec to gradually drift higher from current levels, trying to play some catch up game with UST (US treasury) which has shown a relentless rise
While the interest rate swap curve in India has already discounted 3-4 rates hikes, the week on week supply may not let yields soften materially from current levels. Fixed income investors are better off focusing on ‘carry’ strategies in such scenario.
The writer is Group President & MD, Kotak Mahindra Asset Management Company. Views expressed are personal.