05 DECEMBER 2019
The Fifth Bi-Monthly Monetary Policy Statement for FY 2019-2020 was released by the Reserve Bank of India (RBI) on 5th December 2019. Following were the key highlights.
1. Repo rate was left unchanged at 5.15%.
2. Stance left unchanged as “Accommodative”.
Consequently, the reverse repo rate and the marginal standing facility (MSF) rate / Bank rate remains unchanged at 4.90% and 5.40% respectively.
The Monetary Policy Committee (MPC) surprised markets by unanimously turning risk averse at the first signs of rising inflation. The ‘pause’ in the rate-cut cycle was, however, accompanied by a strong forward guidance indicating that there is space for further cuts, possibly prolonging the easing cycle.
10 yr G-Sec movement around the current & previous RBI Policies
In addition to increasing food prices, the 120-180bps rise in household inflation expectation may have prompted the RBI to ‘wait and watch’ the CPI trajectory over the next few months, as per Citi analysts. They believe that the MPC may have resolved to retain some ‘tactical’ flexibility in case fiscal slippage in the Feb 2020 budget comes higher than expected, that may lead to volatility in the bond markets. The RBI however expressed satisfaction over the improvement in transmission of monetary policy, as Weighted Average Lending Rate (WALR) on fresh rupee loans declined by 44bps in the Feb-Oct19 period, against a 135bps cumulative reduction in the policy repo rate.
10yr G-sec Bond yields rose 15bps to close at 6.61% on Dec 5th, as market expectations of another 25bps reduction in the policy repo rate remained unfulfilled. Given limited room for further fiscal stimulus, Citi analysts believe that support from monetary policy is essential to effect a meaningful revival in growth.
Fixed Income investors may continue to focus on high credit quality with a preference for short duration and remain diversified in their portfolios. For more details and implications for your portfolio, please contact your relationship manager.