First Bi-monthly Monetary Policy Statement, 2019-20

Puneet Pal, Deputy Head - Fixed Income, DHFL Pramerica Mutual Fund

The MPC today delivered a 25 bps rate cut while maintaining a Neutral Stance. MPC voted 4-2 in favour of the rate cut and 5-1 on retaining an unchanged 'Neutral' stance. RBI lowered its forecast both for Inflation and GDP Growth (by 20 bps for FY 20) while sounding cautious on the fiscal situation.

The market backdrop in the run up to the policy was positive with market participants expecting a change in stance apart from the cut. A small minority were also expecting 50bps rate cut. The unchanged 'neutral' stance led to a slightly negative reaction post policy with the benchmark 10yr bond yield rising by 4-5 bps.

We expect weaker growth dynamics and a benign inflation trajectory which are offset by by an unclear monsoon forecast, upcoming elections and oil prices. Nevertheless on balance, we continue to expect further elbow room available to RBI to lower rates in the months ahead with room for at least another 25 bps rate cut in the June meeting.

Post today's change and given upcoming supply on Government bonds, we expect G sec yields to trade in a range of 7.20-7.50%. We expect the curve to steepen further and the Spreads securities(AAA Corporate Bonds / State Loans) to outperform the Sovereign curve.

Source : Equity Bulls

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