Monetary Policy Update - June 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 to contact-intensive sectors, enhancement of exposure thresholds under resolution framework and more were also announced by the RBI in today's policy.

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RBI announced G-Sec acquisition programme of Rs. 1 lakh crore for Q1FY22. In all likelihood this G-Sec buying programme would continue for the rest of the year as well. It explicitly says RBI's intention is to prevent long dated G-Sec moving significantly higher. It is positive for the bond market and will also ensure that long term rates do not move higher allaying concerns of the bond market. The yield across segment are trading in a narrow range over the last two months and is expected to follow this range bound movement. RBI has been active in the secondary market as well. This will continue to be a major driver for near term yield movement. The inflation projection has been revised upwards by around 20-30 bps for next few quarters and FY22 but remains well within the 6.0% limit. Given RBI's focus on growth, inflation does not seem to be a concern area in the immediate future in terms of changing their policy stance. Overall, we believe that given the huge borrowing amount of around Rs. 22 lakh from the Centre and states in FY22, supply pressure remains, particularly at the longer end of the yield curve. It is better to avoid exposure to long tenure bonds.

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Source : Equity Bulls

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