The government 10-year bond yields fell nearly 8 basis points on Thursday as analysts viewed the Reserve Bank of India’s policy tone was more dovish than expected.
The 10-year bond yield fells 8 basis points to 6.72 percent from its previous close of 6.8 percent. Bond yields and prices move in opposite directions.
The monetary policy committee (MPC) has kept both the repo rate and reverse repo rate unchanged at 4 percent and 3.35 percent. Also, the panel continued with the so-called ‘accommodative’ stance against the backdrop of elevated levels of inflation.
“The tone of the policy review appeared sanguine on domestic inflation and cautious on growth, with a view to not sacrificing the latter in a futile attempt to control imported inflation... With the tone being more dovish than expected leading to a back-ending of rate hike expectations, and the comeback of the reference to an orderly evolution of the yield curve, the 10-year G-sec yield cooled back to pre-Budget levels,” said Icra chief economist Aditi Nayar.
Nayar expects the 10-year yield to cross 7 percent in April once the FY23 borrowing programme kicks off. However, it is likely to climb at a slower rate thereafter, given the postponement in the likely timing of the first repo rate hike to August 2022 or later, from our earlier expectation of June 2022, she added.
“With the (RBI) governor dousing fears of premature tightening and no additional MPC member voting for a stance change, a shift to a neutral stance in April 2022 appears to be ruled out, unless the CPI inflation exceeds the upper threshold of 6 percent in both January and February 2022,” Nayar said
On the growth front, the RBI said it sees FY23 growth at 7.8 percent. Further, it has forecast Q1FY23 growth at 17.2 percent, Q2 at 7 percent, Q3 at 4.3 percent, and Q4 at 4.5 percent. On inflation forecast, the central bank expects CPI inflation for FY22 will remain at 5.3 percent and for FY23 CPI will be at 4.5 percent.
The RBI said variable rate repo operations of varying tenors will henceforth be conducted as and when warranted. Second, variable rate repos and variable rate reverse repos of 14-day tenors will operate as the main liquidity management tool. Third, these operations will be aided by fine-tuning operations. Fourth, with effect from March 1, the fixed rate reverse repo and marginal standing facility will only be available from 5.30-11.59 pm on all days.
Suvodeep Rakshit, senior economist, Kotak Institutional Equities, said against RBI estimates, he expects FY23 GDP growth 30 bps higher at 8.1 percent and FY23 CPI inflation 50 bps higher at 5 percent. Rakshit believes it would be opportune to increase the reverse repo rate by 40 bps in the April policy.
Analysts say the market was broadly expecting a drawdown of ultra-accommodative monetary policy by a partial restoration of the repo-reverse repo rate corridor, with some even expecting forward guidance on further monetary policy normalisation. Instead the RBI surprised by not only doubling down on its now familiar orthodoxy of keeping rates and stance unchanged, but also expressed a very dovish outlook for inflation for FY23, forecasting it at 4.5 percent.
“This comes despite higher oil and commodity prices, growth-supporting fiscal policy, continued economic normalisation, and a distinctly hawkish Federal Reserve. This suggests that the RBI is likely to remain behind the curve until macro circumstances warrant a shift of gears,” said Aurodeep Nandi, India economist and vice president at Nomura.
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