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RBI Policy | Expect a departure from 'accommodative' to neutral stance but without any rate action, says Lakshmi Iyer of Kotak AMC

Markets will look out for some policy announcements to anchor the long end of the yield curve—Operation Twist, GSAP, HTM dispensation, etc

April 06, 2022 / 01:09 PM IST

It is that time of the year
When market toys between greed and fear
As they await RBI MPC decision with a patient ear
Will it be yet another day mere
Or see bond yields shed some more tear

Till then it’s a wait and watch for bond markets here

This is the market mood ahead of the Reserve Bank of India’s monetary policy committee meetings most of the time.

The ever-evolving situation globally and developments on the domestic front make it a daunting task to gauge the precise policy moves.

The undertone of the policy in February was visibly dovish—on the back of an expected benign inflation regime. Since then, we have seen the outbreak of the Russia–Ukraine war, which has led to spike in crude oil prices (around 20 percent since the last policy date).

We have seen an uptick of 6-6.5 percent in domestic petrol, diesel and LPG cylinder prices as well. Hence, it is highly likely that the current inflation (read CPI) forecasts may see an upward revision in the upcoming policy to be announced on April 8.

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Globally, too, inflation headwinds continue to haunt. We have seen the US Federal Reserve hike rates first time in over three years to combat the worst inflation since the 1970s.

As recent as December 2021, markets were discounting around three rate hikes in the calendar year 2022. Now, we are staring at around seven-eight rate hikes during the period. The inversion of the yield curve may not deter the US Fed from rate hike moves yet.

What will Indian policymakers likely do?

The answer is not straightforward. Will the MPC do a U-turn after maintaining a dovish undertone till recently—that would be a key watch area.

We also kickstart FY2023 with the government’s borrowing programme April onward. Around 60 percent of the total borrowing has been announced for H1 FY 23. How well the RBI—as the government’s merchant banker—can navigate this mammoth borrowing programme would be a key determinant to the direction of bond yields.

Markets will look out for some policy announcements to anchor the long end of the yield curve—Operation Twist (OT) g-sec secondary market acquisition programme (GSAP), HTM dispensation, etc.

Supporting growth recovery is also an important task the RBI cannot ignore, hence it may not signal abrupt or sharp moves in the policy stance for now. The window for narrowing of repo-reverse repo corridor by hiking the reverse repo rate still remains a reasonable chance.

We may also see a departure from an accommodative to a neutral stance, without any rate action. For now, expect yields to remain in the groove with a gradual upward bias.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Lakshmi Iyer is the CIO – Debt & Head – Products at Kotak Mahindra Asset Management Company.
first published: Apr 6, 2022 07:30 am
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