RBI has indicated that the policy is normalizing. What does this mean for debt market investors?

The policy outlook of the RBI in the first bi-monthly monetary policy for FY23 is odd. The current monetary policy is expected due to inflationary pressures at the global level. post it though RBI PolicyBond yields are seeing a further increase.

In the monetary policy of April 2022, RBI kept the repo rate unchanged at 4%, while the marginal standing facility (MSF) rate and the bank rate also remained unchanged at 4.25%. However, maintaining its approach to liquidity adjustment facilities, i.e. LAF corridor normalization, the central bank introduced a permanent deposit facility (SDF) rate, which will now be the floor of the LAF corridor, at 3.75%.

Further, in one of its major developments, the RBI raised the limit under the Hold to Maturity (HTM) category from 22% to 23% of NDTL till March 31, 2023. The move is to enable banks to better manage their investment portfolio during 2022-23.

Also, RBI decided to allow banks to include eligible SLR securities acquired between April 1, 2022 and March 31, 2023, under this increased limit. The HTM limit will be restored from 23% to 19.5% in a phased manner with effect from the quarter ended June 30, 2023.

Prashant Pimple, Managing Director and Chief Investment Officer – Loans, JM Financial Asset Management said, “The Hold to Maturity (HTM) limit for banks has been increased by 1% till March 31, 2023, to account for the government borrowing for this financial year.” With the intention of supporting. Year. Policy corridor has been normalized through SDF and MSF. There is no clarity on the absolute quantum of open market operations with a benchmark of 10 years post-policy.

Abhiq Barua, Chief Economist, HDFC Bank, said, “RBI has responded to both new inflationary and growth challenges that have emerged due to geopolitical tensions, which manifest themselves in rising commodity prices. However, RBI has reduced its monetary policy. Keeping the policy stance unchanged, it restored the policy corridor to pre-pandemic levels and committed to slow liquidity going forward.”

“This is clearly a bullish policy as compared to the February meeting, justified by the inflationary pressures that have emerged in the past one month. It seems appropriate to revise the inflation forecast for FY13 by 120 bps to 5.7%, which Given the broad-based nature of prices,” Barua said.

RBI said in its policy on bond yields, several central banks, especially systemic banks, are on track to normalize and tighten the monetary policy stance. As a result, sovereign bond yields in the major AEs have remained tight. Bullion prices hit 2020 highs on safe haven flows, with bond yields rising with some recent corrections.

The RBI further pointed out that global equity markets have declined, although they have recovered some ground recently. In recent weeks, strong capital outflows from EMEs have softened, curbing downward pressure on their currencies, even as the US dollar has strengthened.

“Overall, the global economy continues to face major constraints from multiple fronts, including uncertainty about the trajectory of the pandemic,” RBI said in its policy statement.

Going forward, Barua said, “Despite the increase in HTM limit, bond yields are likely to rise given the sheer size of the lending program for FY23. We expect the increase to 7-7.25 in 10-year H1 FY23.” % will be.”

On inflation, the RBI expects the consumer price index to be 5.7% in 2022-23, with Q1 at 6.3%; Q2 at 5.8%; Q3 at 5.4%; and Q4 at 5.1%. While real GDP growth for 2022-23 is now projected at 7.2%, with Q1 at 16.2%; Q2 at 6.2%; Q3 at 4.1%; And Q4 at 4%, with broadly balanced risks.

Dr VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said, “RBI has slashed FY23 GDP growth forecast to 7.2 per cent from 7.8 per cent as expected, as expected. gave and raised the CPI. Inflation forecast for FY23 to 5.7 per cent from 4.5 per cent earlier. This is based on crude oil sentiment at $100. This means a rise in crude oil if the war is expected to end soon. “Growth and inflation may improve if there is a decline from .

Shivam Bajaj, Founder and CEO, Avenor Capital, said, “The MPC’s decision to maintain status quo is in line with expectations. RBI has emphasized on a strong buffer of foreign exchange reserves, which can withstand geopolitical tensions and exchange rate fluctuations. The middle can act as a cushion.” “The market reaction to the fall in growth rate to 7.2% and the rise in inflation to 5.7% is to be monitored. It will also be interesting to see how the economy deals with its supply-side inflationary pressures,” he said. side barriers.”

Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund, said, “RBI continues to chart a course unlike most central banks. Along with the status quo on rates and guidance was the governor’s statement that continued to insist on continuing the pandemic. Policy support to ensure broad-based and sustainable growth with continued reference to the impact of the U.S.. There was no clear guidance on phasing out durable liquidity with some procedural changes on the liquidity framework.”

Radhakrishnan said, “While rates have decreased with a steep bias to the near-term impact curve, the continued reluctance to accept a shift in the context of changing dynamics globally and in the context of improving domestic growth remains surprising.” In this context, continued volatility in market rates remains a base case as there appears to be no clear fundamental reason for validating lower rates, except continued slowdown and lack of pre-emptive policy normalization actions by the central bank. except.”