Jun 08, 2017 12:08 PM IST | Source:

What are fund managers saying about the RBI's monetary policy

Reserve Bank of India kept the key policy rate unchanged at 6.25 percent for the fourth time in a row.

Himadri Buch @himadribuch

The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) kept the key policy rate unchanged at 6.25 percent for the fourth time in a row.

After deliberations for two days on June 6th and 7th, the MPC headed by RBI Governor Urjit Patel maintained status quo for the second bi-monthly monetary policy for 2017-18.

The key policy repo rate, which is the rate at which banks borrow short term funds from the RBI, now remains at 6.25 percent while the reverse repo stands at 6.00 percent.

Of the six members, 5 members voted in favour of status quo while one put in a dissent.

On liquidity front, the RBI also reduced the Statutory Liquidity Ratio (SLR) of all banks to 20 percent from 20.50 percent of their net deposits from the fortnight starting June 24.

Here's what fund managers had to say about the monetary policy.

Lakshmi Iyer, CIO (Debt) & Head, Products, Kotak Mutual Fund

The policy has maintained status quo on expected lines. Key is lowering of inflation target, which definitely would augur well for markets. Having said that, the geopolitical uncertainty and the 7th Pay Commission impact is unknown for now and may have kept the policy makers circumspect. We believe that further policy action may be more data-driven – and to that extent the case for a rate cut is not ruled out.

The interest rate trajectory is likely to remain benign as liquidity and macro conditions remain supportive. Investors should continue to remain invested in long duration funds. Those seeking a more stable portfolio bias could allocate fresh money to corporate bond funds with a higher accrual. Tail-end allocations could still be made into duration funds as and when we see consolidation in yields.

Murthy Nagarajan, Head, Fixed Income, Tata Asset Management 

The statements from RBI is dovish. The RBI has guided the CPI inflation to  3.5 -4.5 percent for March 2017. Viral Acharya, the Deputy Governor, has stated the data of CPI and GDP has surprised on the downside which could allow the RBI to follow an accommodative stance if the data persists. The market may expect the RBI to cut rates in the coming policy.

Arvind Chari, Head, Fixed Income & Alternatives, Quantum Advisors

That the RBI would leave the repo rate unchanged at 6.25 percent was expected, but what we were looking for was its assessment of future inflation and for a divergence in the views of the Monetary Policy Committee (MPC) members.

We seem to have got both; the RBI has lowered its inflation projection for FY18 taking into account recent inflation data. As also for the first time the MPC voted 5-1 to hold rates, which means that one member possibly voted for a rate cut.

This does open up the scope for a rate cut in the August policy, if monsoon progresses as expected and if global conditions continue to remain favorable.

R Sivakumar, Head, Fixed Income, Axis Mutual Fund

The RBI left rates unchanged in the MPC meeting today. The meeting saw the first dissent from Ravindra Dholakia. Dholakia had projected lower inflation than the RBI baseline in the last policy statement.

The fall in inflation over the last six to eight months is now seen to persist for a while and the RBI now expects that inflation by the end of the current financial year will be close to its target of 4 percent. If inflation remains low, this could result in rate cuts in the months ahead. In particular, the outlook for inflation has improved, thanks to persistent low food inflation and non-inflationary GST rates. The risk of any rate hike in the coming months has receded.

Avnish Jain, Head, Fixed Income, Canara Robeco

 The policy was on expected lines with the RBI keeping key rate repo rate unchanged at 6.25 percent. However, the RBI lowered its forecast for inflation for the first half of 2018 at 2-3.5 percent and for second half at 3.5-4.5 percent. While acknowledging slowdown in CPI inflation, the MPC members chose to wait for more data points for any action, which is likely to be a rate cut. The RBI highlighted global socio-political risks, farm loan waivers and impact of 7th Pay Commission adjustments as upside risk while noting that GST is unlikely to have material impact on inflation

Killol Pandya, Head, Fixed Income, Peerless Funds Management 

Overall, the policy was an expected non-event as far as rate action is concerned. In addition, the RBI has (expectedly) not changed its stance and kept it at neutral. RBI appears to have retained rates and kept its stance unchanged in the interest of avoiding ‘premature action’ which could dent its ‘credibility’.

We believe this refers to RBI considering a tweak in rates only after looking at more data prints and after filtering the several transient and short-term data trends which may be blurring long-term perspective. From the market perspective, this policy is broadly neutral for bond participants. The policy seeks to clarify RBI's line of thought and refocus on core issues such as management of inflation and economic revival rather than provide any significant clarity on interest rates.

Bekxy Kuriakose, Head, Fixed Income, Principal, PNB Asset Management Company

As expected by us the RBI kept key rates on hold and maintained their neutral stance. Inflation projections and real GVA growth for FY18 have been lowered based on recent data releases. On GST, RBI assesses that it may not have a material impact which is comforting. The RBI appears to be against taking premature action on the rate front and would like to observe further data prints on inflation and real activity front. The key concern remains the state of banks’ balance sheet including much-needed recapitalization.

Given recent data prints, ample banking system liquidity and macroeconomic stability on domestic front we think gilt and bond prices will be supported post RBI policy.

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