The Reserve Bank of India’s (RBI’s) latest monetary policy reflects a cautious response to an increasingly uncertain global environment. Amid escalating geopolitical tensions in West Asia, elevated energy prices, and volatile financial markets, the Monetary Policy Committee (MPC) prioritised stability while retaining flexibility to respond to evolving risks.
On the external sector, the RBI expanded the fully accessible route (FAR) to include all fresh issuances of 15-, 30-, and 40-year government securities and facilitated external commercial borrowings by public sector entities. Together with the government’s capital gains tax exemption for foreign investors in government bonds, these measures are expected to support capital inflows, strengthen sovereign debt markets, and bolster the rupee. Overall, the policy was broadly in line with expectations and may be viewed as mildly dovish.
The classical conundrum faced by RBI as it navigates through a complex set of variables appears to be of managing the currency, economic growth, and inflation.
We feel that RBI’s own cautiousness rightly emanates from its objectives of navigating through global shocks while causing minimal disruption for our domestic economy and markets. Uncertainties regarding the resolution of the Middle Eastern crisis and domestically, the prospects of below-average monsoons make the outlook clouded for the central bank.
In this context, RBI appears to have calibrated its policy decisions to reflect its multi-pronged approach in the face of significant uncertainties and headwinds. While it was largely expected that RBI would keep repo rate and stance unchanged, market participants may appreciate RBI’s actions of assuring markets of adequate liquidity while recognizing a measured uptick in inflation and core inflation, as well as a reasonable reduction in economic growth. This approach projects an image of RBI being conscious of the implications of global events and developments on the domestic economy and is prepared to react strongly and promptly to meet the challenges.
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As such, the external sector reforms seem to be oriented towards improving our currency exchange rate and foreign exchange reserve positions. The policy was broadly in line with bond market expectations and may be seen as mildly dovish. The policy may lead to some reduction in concerns regarding the timing of future rate hikes. This may contribute to positive moves in bond markets in the short term,
For now, RBI may have hinted at a pause in interest rates while it assesses the evolving global geopolitical events and their economic & financial implications. In the medium to long term, however, the domestic narrative remains broadly unchanged. With many of the positive events and actions behind us, including 125 basis points (bps) repo rate cuts, we may see participants eventually turn towards securing higher accruals via instruments like curated corporate bonds and sovereign assets
Our base case is that RBI’s MPC policies may become live for rate changes from the August policy onwards, with a higher probability of RBI looking to make rate changes towards the October- December policies.
(Disclaimer: This article is by Killol Pandya, head of fixed income, JM Financial Asset Management. Views expressed are his own.)
