Here’s how top mutual fund managers reacted to Reserve Bank of India’s move:
Avnish Jain, Head of Fixed Income, Canara Robeco MF
The MPC meeting unveiled plethora of measures for bond markets with some fireworks before the festive season! The rate action was on expected lines with the Committee deciding to maintain “status quo” on rates in light of high inflation in recent times as well stance being maintained as accommodative. In a first, forward guidance for stance was spelled out. The MPC said that the stance is likely to “…continue with the accommodative stance at least during the current financial year and into the next financial year”.
This reinforces RBI’s resolve to continue to support the economy in post pandemic recovery. There were more surprises in store in terms of liquidity measures viz. OMO size increase to Rs 20,000cr (already announced for next week), special OMOs in state development loans (first time it is happening), on tap TLTRO (targeted long term repo operations) for upto Rs1 lac crore for specific sectors. The TLRTO can be used for investing in corporate papers as well as for giving loans and advances. Further this facility will be exempt from large exposure framework and can be classified in HTM category over and above 25% limit. This is likely to give boost to bank lending. The RBI’s measures clearly point towards its desire to maintain adequate liquidity as well as keep yields low in an environment on elevated government borrowings”.
“The markets reacted positively with 10Y yields dropping by ~8 bps. The announcement of OMO stocks further consolidated the rally with good participation expected in today’s auction. Whilst near term inflation prints are likely to keep markets cautious, yields should soften on back of RBI measures. Increase in OMO purchase size to Rs.20000 cr should go a long way in helping the smooth passage of government borrowings. In the short term 10Y is likely to trade in a range of 5.80-5.95% with a downward bias”.
Bekxy Kuriakose, Head – Fixed Income, Principal Asset Management:
The RBI MPC kept key rates unchanged and stance at accommodative as expected. However what was interesting to note this time with a new MPC constitution was that the MPC decided to give a “forward guidance” for the stance. Majority of the members with exception of 1 decided to keep the stance at accommodative for the rest of the current financial year and even beginning of next financial year. Thus the stance is as dovish as can be even in the background of inflationary concerns. This is of course because the MPC now accords highest priority to revival of growth and attributes inflationary concerns primarily to supply shocks which are expected to dissipate.
A number of meaningful measures have been taken outside the MPC ambit in the Statement on Developmental and Regulatory Policies. These include OnTap TLTROs for tenor of 3 yrs upto 1 lakh cr with further relaxations for such investments from Large Exposure Framework requirements and permission to hold in HTM. Apart from this limits increased earlier in Sept by RBI for Bank SLR HTM limits have now been extended to march 2022 from march 2021.
The third most significant announcement for the market is the declaration for the very first time by RBI to conduct OMOs in SDLs (State Development Loans). This would help support the expected increase in SDL supply this year due to tax revenue slippages on account of COVID pandemic and slowdown of growth.
All in all RBI continues to keep pressing the accelerator for taking all necessary steps to support growth even while choosing to ignore the recent spikes in inflation.
We expect bond yields to soften post this announcement and prices to rally across gilts, SDLs and corporate bonds. Money market yields are already trading at low levels in the backdrop of ample banking system liquidity and past rate cuts.
Mahendra Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers India:
In a, so far yet strongest, reinforcement of its accommodative stance, RBI announced series of confidence boosting measures, including commitment to conduct adequate OMOs, introduction for the first time, OMOs of state development loans and On Tap TLTROs amongst the major ones. More importantly, it provided long term guidance to maintain the current accommodative at least for the next 3 quarters. At a time when market participants were struggling with concerns on rising inflation and large govt borrowings, such an assuring policy statement would help bring stability, confidence and renewed enthusiasm in debt markets. RBI has put on display its full range of tools and the commitment to deploy it without hesitation and it should leave no doubt that the recent green shoots will get unprecedented care and nurturing to grow into full blossom. Market now has one less factor to worry on outlook , given the strong intent and demonstrated action by RBI in current environment. We feel more confident about a sustained recovery in Indian economy in coming quarters under this backdrop.