Monetary Policy Update - April 2021 - ICICI Direct

The Reserve Bank of India (RBI) expectedly maintained its repo rate at 4.0%, reverse repo rate at 3.35% and MSF at 4.25%. MPC members voted unanimously on status quo and maintained an 'accommodative' stance. Several measures like TLTRO extension, raising prepaid payment instruments (PPI) limits and more were also announced by the RBI in today's policy.

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The bond market was in a wait and watch mode going into FY22 to digest Rs. 12 lakh crore of G-Sec supply. With the explicit guidance now on G-Sec buying programme (FY22 buying could be around Rs. 4 lakh crore with Rs. 1 lakh crore every quarter), supply concerns seems to have been addressed, to a certain extent. The bond market reaction immediately post policy announcement reflected the same with 10 year benchmark yield moving 4-5 bps lower to 6.12%. RBI OMO purchases in FY21 were Rs. 3.13 lakh crore. Hence, in a way this year, G-Sec purchases are likely to be higher than last year. Inflation projection for Q3FY22 has been marginally increased from 4.3% to 4.4% and for Q4FY22, it is now pegged at 5.1%. Projection for Q1 and Q2 FY22 is at 5.2%. While inflation projection is at the higher end of the range, focus remains to "sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy". Hence, in a way, inflation does not remain a focus area for the RBI in the next few quarters. Short term bond yields have already moved up with continued RBI's effort to reduce term premium by absorbing some liquidity through variable term repo. RBI announced continuance of its longer tenure variable term repo. The same may keep short term rates elevated.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_RBIAction_Apr21.pdf

Source : Equity Bulls

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