RBI Monetary Policy: Non Committal

The RBI kept rates unchanged in a widely expected monetary policy announcement. The MPC also decided by a majority of 5 of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth

Notable inferences for the governor’s speech

• Inflation estimates lowered to 5.1% for FY 2024 & RBI governor deviating from talking about an inflation band to moving towards the inflation target.


• RBI is positive on growth outlook and retained full year GDP ay 6.5%

Banking Liquidity

Withdrawal of Rs. 2000 notes, inflow of tax revenues and forex inflows on account of FPI participation in the capital markets have resulted in a spike in system liquidity to ^~Rs 2 lakh Cr. In the press conference post the policy announcement, the RBI governor emphasized Rs 1.85 Lakh Crore being deposited and only 20% of Rs. 2000 note got exchanged, this will further increase the liquidity in the banking system. The RBI has been conducting short tenor repo operations to suck out this excess liquidity without much success. We believe, the current surplus liquidity can be seen as a positive both for credit growth & softening interest rates (Already evident with money market yields dropping in April & May 2023)

Source: Bloomberg, RBI, Axis MF Research

Data as of 7^th June 2023

Growth

Domestic growth indicators continue to show robustness as reflected by high frequency indicators. Further, a normal monsoon, government investments and a strong Rabi crop could support household consumption further spurring growth. RBI remains positive about the FY24 GDP growth. The headwind for the positive outlook is from weak external demand, volatility in global financial markets, protracted geopolitical tensions and intensity of El Nino impact, however, pose risks to the outlook.

Market Moves

Surplus liquidity conditions, coupled with positive macro-economic data has resulted in money markets yields softening by ^~45-60bps from March 2023 peaks. Stable policy rates across the last two MPC meets have also led 1–5year segment rates to soften albeit marginally. Post policy, market rates have remained largely unchanged.

Our View

The fall in inflation across the world and in India have given much needed breathing room for the RBI. We must recall, the RBI remained skeptical about inflation (understandably cautious) in the previous policy meeting. Further, the change to target rate from band implies that RBI has further clarity on inflation. Keeping these facets in mind, we continue to opine, rates have largely peaked.

We believe the actions of the RBI are prudent. Our estimates on growth remain lower than those of the RBI factoring base effects, more neutral view on rural consumption trends and impact on exports due to global slowdown. We expect growth projections lower than RBI expectations.

Two risks that would require the RBI to change tact.

• US Fed raises rates to 6%


• El Nino & a weak monsoon result in inflation spiking

From a portfolio standpoint, in line with our medium-term view, our portfolios currently run duration at the higher end of the respective investment mandates. Our expectations of incrementally softening yields across the curve and a possible policy pivot in favor of softening rates in the latter half of the financial year, this has already been factored into the current portfolio positioning. Recovery in credit spreads over the last 3-4 months has also made corporate credit (AA & above) attractive from a risk reward standpoint.

For investors with a medium-term investment horizon, we continue to believe actively managed duration strategies offer ideal investment solutions to capitalize on a falling interest rate outlook and attractive ‘carry’ opportunities as compared to comparable traditional investment solutions.

Products In Focus

Allocation and strategy is based on the current market conditions and is subject to changes depending on the fund manager’s view of the markets. Data as on 31^st May 2023

Product Labelling

Disclaimer

Source of Data: RBI Governor’ Statement, RBI Monetary Policy Statement & RBI post policy press conference dated 8^th June 2023, Axis MF Research

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