Views on RBI Monetary Policy from Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Life Insurance Limited

"The status quo on policy rates by RBI was in line with consensus and our expectations. MPC maintained the growth projections at 6.7% and marginally revised up its H2 inflation projection to 4.30-4.7% from 4.2%-4.6%. MPC has maintained the neutral stance given negative output gaps in the economy.

The policy guidance is in line with market expectations reflected in spike in 10y yields beyond 7% mark. RBI believes that the higher household inflation expectations and possibility of pass through of higher input costs may push inflation trajectory in future.

Having applauded government in past of for recap efforts RBI now wants banks to transmit previous policy cuts into lower lending rates, aggressive transmission will be difficult if risk-free rates continue to inch above 7% and liquidity condition tighten. The spread between various sovereign bonds and MCLR has already narrowed.

Bond markets had already factored in bottoming out of rate cycle given state of government fisc and rising oil prices. Yields should now consolidate albeit at current levels and await clarity on fiscal front and inflation outcome especially in food prices. 10y bond yields should trade in the range of 6.90-7.10%.

If inflation surprises below 4% for couple of months coupled with Q3 growth prints below 7.00% MPC may ease by 25bps.On the other hand for MPC to consider hiking rates growth has to surpass 7.5% in coming quarters or inflation has inch above 5% on sustainable basis, given remote possibility of same MPC will probably remain on pause for reasonable time".

Source : Equity Bulls

Keywords