Mihir Vora – Director & Chief Investment Officer, Max Life Insurance on RBI Monetary Policy, The Monetary Policy Committee (MPC) of the RBI changed its policy stance from “Calibrated tightening” to “Neutral” and cut the Repo rate by 25 bps. The Committee voted 4-2 in the favour of the cut.
Markets were expecting a dovish policy with a change of stance but the rate cut was not widely expected and was a bit of a surprise. We feel the RBI has front-loaded the cut due to low inflation and a sharper growth slowdown than expected. Depending upon the future trajectory of inflation, there is a possibility of another rate cut over the next 2 quarters.
RBI reduced the inflation forecast for the first half of FY20 from about 4% to 3.2%-3.4% while GDP growth estimates for FY20 were reduced to 7.2%-7.4% (versus 7.5% earlier). A significant change in the narrative is the importance being accorded to the growth slowdown. Previously, there was a sharp focus on inflation.
The benchmark 10-year Govt. Security is now trading lower by 5-6 bps post the announcement. We believe that the future trajectory will be driven by open market operations (OMO). We do not expect large downward movement in yields due to the significant Government borrowing program over the coming months. RBI also announced several measures to ease funding costs and liquidity for the NBFC sector, which is a welcome move given the stress that the sector is under.
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