Moneycontrol Pro Panorama | Keep calm and show up

market

Dear Reader,

Unlike the celebratory sentiment due to the big trade deals India has struck with both the US and Europe, and the congratulatory tone on the country’s economic resilience, in his policy speech RBI Governor Sanjay Malhotra chose to simply focus on the success and challenges that await the economy in the coming months. Keeping calm and reassuring the markets that it will do what is needed at the appropriate time seems to be the RBI 's current policy.

The monetary policy committee’s statement did note that the trade deals improve the prospects of exports growth and therefore, growth in gross domestic product (GDP). This improved outlook has led to the RBI marginally hiking its GDP growth projection for FY26 to 7.4 percent from 7.3 percent earlier. At the same time, the surge in global metal prices has thrown up a challenge for domestic inflation which is captured in the marginal upward revision of inflation projection for the first and second quarter of FY27. Dinesh Unnikrishnan explains why the central bank should be appreciated for its restraint in our quick take on the policy here.

The tone and the language of the policy statement fitted perfectly with the expectations of the market. Also, policy rate and stance were left unchanged as expected. The marginal changes in the growth and inflation projections don’t matter as their use is limited -- The RBI has smartly chosen to wait for the new GDP and inflation series due later to determine FY27 projections and so, investors should wait for these to make decisions.

What Malhotra has promised is pre-emptive measures to support liquidity needs of the market as and when needed. While the statement did sound like the rehearsed policy rhetoric, it should be taken in good faith. In his post-policy media interaction, the Governor did emphasise the seriousness of liquidity management. “Liquidity is something that is our duty to provide. The second task is the monetary policy transmission must happen,” he said.

Indeed, transmission has been a bugbear for the central bank. Our Chart of the Day shows how transmission has broken down in the bond market. Even today, the bond market threw a small tantrum as the 10-year benchmark bond yield rose by about 5 basis points to 6.70 percent after Malhotra’s speech failed to mention outright liquidity measures. To be fair, a colossal supply of Rs 17 lakh crore waits in the wings for the bond market in FY27 and investors have reduced their appetite. Bond investors were hoping for a clear indication of more purchases by the RBI under open market operations.

What this means is both the forex and the bond markets can expect the RBI to keep showing up whenever required to support the asset prices there. The central bank is likely to buy government bonds in FY27 to help the borrowing sail through and the rupee would also find support during volatile times.

The RBI has been prudent in keeping its liquidity cards close to its chest at this point, given that banking liquidity surplus has increased after its recent measures. The central bank must continue to deliver the liquid courage that markets expect every now and then. It is a fair bet that the RBI would do so.

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Aparna IyerMoneycontrol Pro