Vikas Garg, Head of Fixed Income, Invesco Mutual Fund
“Unexpected rate pause by MPC indicates lesser uncertainty on global monetary policy rate actions. However, war against domestic inflation not yet over as reflected in continued “withdrawal of accommodation” stance. Overall, a dovish pause than the market expectations. This pause has raised the bar higher for any more rate hikes, if required to tame the inflation. As of now, we are in for a long pause as inflation remains higher than the target.”
Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC
The hawkish tone in the February policy statement and surprise jump in Inflation in the last month had fuelled an expectation of a rate hike in this policy.
Thus, a ‘no rate hike’ was a positive surprise.
The governor made special efforts to sound hawkish by singling out this rate pause as onetime deviation from its broader monetary policy path. Despite the use of Phrases like ‘for this meeting only’ and ‘a pause not pivot’, the bond market seems to have read it differently. Bond yields fell by around 10 basis points post policy announcement with the 10 year government bond yield falling below 7.2%.
The governor made repeated reference to the potential impact of the effective 290 basis points of rate increases in the last 1 year. They also revised down its inflation forecast for FY24. This indicates that the RBI has probably reached its destination in terms of the level of Repo Rate and will hike rate only if inflation path moves up significantly. The pause also seems to be driven by global financial stability issues.
Going ahead, the bond market will price for extended rate pause with terminal repo rate at 6.5%. This should open up space for Government bond yields to go down. We would expect the 10 year government bonds to trade between 7.00%-7.40%.
At current yield of 7.2%, government bonds are now offering positive real yield of about 200 basis points based on 4 quarter ahead inflation estimate of 5.2%.
Also, with the rate hiking cycle nearing end and inflation trending down, probability of capital gains in long term bonds has increased. Investors with over 2-3 years investment horizon should allocate to dynamic bond funds which tends to benefit in this kind of interest rate environment. Conservative investors with shorter holding period should stick to liquid funds with good credit quality portfolio.
Nilesh Shah, MD, Kotak Mahindra Asset management Company
“The RBI’s pause is like Sachin stroke on a tricky pitch but with eyes set in and having the luxury of hitting the ball where ever he wanted. The RBI had the option of a rate hike or a pause. The pause was not entirely unexpected.
The RBI will watch developments and data before taking the next call. The market expects the RBI to fetch maximum run and win the match on inflation and growth, no mater which Direction they hit the ball.”
Deepak Agrawal, CIO- Fixed Income, Kotak Mahindra Asset Management Company
“The RBI MPC outcome was a “hawkish pause”. The MPC decided to keep rates unchanged in April 2023 meeting. The stance was maintained as withdrawal of accommodation with a 5:1 vote. Given global financial stability concern and H1 FY 24 inflation is likely to average ~ 5%, we expect RBI to remain on hold for rest of CY 2023. The bond market has reacted positively and 10 year Gsec yield is lower by 10 bps to 7.17.”
Murthy Nagarajan, Head- Fixed Income, Tata Asset Management
“RBI surprised the markets by not hiking policy rates. RBI, however maintained its stance of withdrawal of accommodation. RBI has upped its GDP growth forecast to 6.5 versus 6.4 previously and CPI inflation forecast has been bought down to 5.2 versus 5.3. It also indicated it is only a pause in rates right now. Real rates which is the difference between expected CPI inflation and Repo rates now stands at 1.3 % positive. The bar is now high for RBI to hikes rates in the upcoming policy unless macro-economic conditions change dramatically. The ten-year G sec yield is expected to trade in the range of 7.10%- 7.30% and may move towards 7 % levels if CPI inflation moves towards 5 % targets.”
Mahendra Jajoo, CIO, Fixed Income, Mirae Asset Investment Managers
Taking note of the recent developments in global markets, including the banking system disruptions in the US, that are expected to result in a pivot in monetary policy globally, the MPC has kept the key policy rates unchanged. Even as the inflation remains on the higher side, the impact of the recent fast-paced rate hikes in moderating future inflation trajectory needs to be assessed before further action, especially as the inflation is now projected to moderate to 5.2% in FY24.
This turned out to be a pleasant surprise to market participants where the near consensus was for a 25bps hike. Traders rejoiced with bond yields easing by about 10bps immediately after the policy announcement. Growth projections for FY 2024 have been increased by 10 bps from 6.4% to 6.5% and inflation projections reduced by 10 bps from 5.3% to 5.2%.
It was emphasised that the decision to pause is applicable for this policy meeting only and future action would depend on the evolving situation.
Markets are likely to remain positively biased with bond yields likely to remain range bound, after having already come down by 25-30 bps from the recent highs. Long term rates are likely to have peaked in the current cycle and the duration funds are expected to start showing improved performance in coming months
Prashant Pimple, Chief Investment Officer – Fixed Income, Baroda BNP Paribas Mutual Fund
The monetary policy action is in line with our expectation of a pause ; though majority of market was expecting a 25 bps last hike. We take this move as a step towards a long pause with a cautious view over the food inflation as well as energy prices thereby impacting the overall inflation.
The MPC increased GPP for FY 24 from 6.40 to 6.50 % and also reduced the inflation outlook from 5.30% to 5.20% for FY 2024. Further , improvement in CAD in last 3 months bodes well for the economy. The yield curve is expected to steepen going forward with more certainty on the terminal rate.
We expect the 10 yr to trade in the range of 7.10-7.25 in the near term.
Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund
“A pause not a Pivot,” this is how the RBI governor chose to describe the outcome of the MPC meeting today. The MPC today unanimously decided to hold the policy rates while retaining the monetary policy stance at “Withdrawal of accommodation.” The market was divided going into the policy with the swaps market pricing in a 50% probability of a pause. The yield curve has steepened marginally with the 5yr G-sec yield down by 10-11bps and the 10 yr yield down by 6-7 bps. Going ahead, the market will focus on RBI’s liquidity management and global yield movement. Supply pressure can negate any meaningful downside in yields and we expect the benchmark 10 yr bond to trade in a broad range of 7.00% to 7.40% over the next one quarter.”
