By Lakshmi Iyer
The RBI MPC kept the key rates unchanged unanimously on expected lines. The committee also reiterated its accommodative stance both on rates and liquidity. While growth forecast was marked down to 9.5% from 10.5% with risks broadly balanced, the inflation (read CPI) forecast was marginally raised to 5.1% for FY 2022.
The bigger move in the policy was with regards to the orderly evolution of the yield curve. We saw the announcement of G-SAP 1.0 being extended to state development loans (SDLs). Of the Rs 400 billion of residual G-SAP 1, Rs 100 billion has been earmarked for SDLs. Also, the G-SAP 2.0 for Q2 FY2022 has been announced for an amount of Rs 1.2 trillion. It is fair to extrapolate that some amount of this would be dedicated to SDLs too. The RBI stressed on smooth liquidity management and orderly Gsec borrowings and seems to walk the talk all along. While the inclusion of SDLs is a welcome move, it may have a marginal negative bias on central govt bonds, This may get further exaggerated when markets get more clarity on the impending additional borrowing of INR 1.58 trillion (timing not yet known). But there is no doubt that we have a central bank continuing to do the ‘Main Hoon Na’ act to ensure non-disruptive passage of the government borrowing program. We are of the view that RBI will continue to strive to fix the currently skewed yield curve and maintain its preference for curve flattening.
On the other liquidity and regulatory front, we saw some continuity to the measures announced in May 2021. Resolution 2.0 was expanded to cover a wider range of borrowers. On-tap liquidity of INR 150 billion for 3 years at repo rate to provide loans to contact sensitive services i.e. hotels, restaurants, tourism, among others, is quite thoughtful of the central bank as these sectors have borne the maximum brunt of the current wave of the pandemic. The RBI also announced new special liquidity worth Rs 160 billion to SIBDI for on-lending for MSMEs at the prevailing policy repo rate for a period of up to one year. This move is likely to aid in kick-starting the investment cycle.
We do not see any urgency on the part of RBI to rush into normalisation yet. They seem to be committed to maintaining adequate liquidity to ensure growth levers do not get compromised. This bodes well for the short to mid-end of the yield curve. The fixed income strategy continues to be carry oriented than capital gains oriented for most part of FY 2022. Fixed-income investors must recognise this carry potential and stay invested/ allocate fresh funds into low to moderate duration portfolios.
(Lakshmi Iyer is the CIO – Debt & Head – Products, Kotak Mahindra Asset Management Company. Views are personal and do not reflect the views of Kotak Mahindra Asset Management Company Limited and Financial Express Online. Please consult your financial advisor before investing.)
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