The Reserve Bank of India (RBI) is likely to maintain the status quo in the upcoming monetary policy on April 5, said Murthy Nagarajan, Head – Fixed Income, Tata Asset Management, during an exclusive interview with Moneycontrol on March 20.
In February's monetary policy, the central bank had retained the repo rate, a key interest rate, at 6.5 percent for the sixth consecutive time, signalling that the long battle against persistently high inflation continues.
He added that the central bank’s projection for Consumer Price Index (CPI) inflation for next year is 4.5 percent, assuming a normal monsoon. The RBI is expected to wait for Indian Meteorological Department's forecast before forming a view on food inflation.
The central bank's monetary policy committee (MPC) is scheduled to meet between April 3 and April 5.
Edited excerpts:
As we are close to the end of March, how do you see liquidity conditions playing out and call money rates?
Liquidity conditions have eased due to government spending and RBI actively doing Repo operations to inject liquidity in the system. Liquidity is expected to tighten in the coming days due to GST outflows of around Rs 1.75 lakh crore. As per the interim budget, the government's opening cash balance for next year is expected to be around Rs 40,000 crore. This indicates the government will be spending aggressively in the coming days, as the cash balance after GST Collections is expected to be above Rs 3 Lakh crore. Liquidity in the last week is expected to be easy and call money rates are expected to trade below 6.75 percent as government spending flows into the system.
What has happened to the G-sec yield, especially the 10-year benchmark bond? Why has it increased again after falling close to 7 percent?
The fall in the G-Sec yield was due to buying by insurance companies, the EPFO and NPS at the long end of the yield curve. FII debt inflows have also been strong at $6.45 billion in this calendar year. The monthly current account deficit, which includes mercantile and services trade, is in the band of $1-2 billion compared with the average monthly trade deficit of $4 billion last year. Central government borrowing got over on 16th February for the current financial year. The State government weekly auctions are lower than the indicative borrowing calendar of state governments. This led to the Indian ten-year yield moving down towards 7 percent levels.
US data has come in strong with nonfarm payroll (the number of people employed, other than on farms) at 275,000 for February. U.S CPI inflation for February has come in at 3.2 percent. The ten-year US yield has moved up by 25 to 30 basis points from below 4 percent levels. After this data, the debt market has now priced out 125 basis points of rate cut and has settled for a 50-75 basis point rate cut in the current calendar year (one basis point is one hundredth of a percentage point). Crude oil prices have moved up as production cuts are getting implemented by Russia and other OPEC countries, Brent oil prices are trading at $85 per barrel.
Indian markets have reacted to global developments. Domestically, we have weekly State loan auction amounts increasing to Rs 50,000 crore against the calendar amount of Rs 36,000 crore. The Indian ten-year yields have moved up from 7 percent levels to 7.08 levels due to these developments.
In the first week of April, we have the monetary policy. What are your expectations on the rate front and inflation projections?
GDP growth for the current year is expected to be above 7.5 percent. As per the RBI's projection, GDP growth for next year is expected to be around 7 percent. CPI inflation for January and February continues to be above 5 percent levels, 1 percentage point higher than the RBI target of 4 percent. Higher inflation is due to food prices flaring up due to EL Nino conditions; core inflation, which excludes food and fuel items, is at 3.3 percent for February 2024. The RBI projection of CPI inflation for next year is 4.5 percent, assuming a normal monsoon. The RBI is expected to wait for the Indian Meteorological Department's forecast before forming a view on food inflation. The RBI Governor has stated that the last mile of bringing CPI inflation to the target of 4 percent is the toughest. We expect the RBI to maintain the status quo in the April policy due to strong growth.
How do you think the inflation print will look going ahead and what impact will it have on yields?
CPI inflation is expected to be at around 5 percent levels and briefly fall below 5 percent due to the high base effect. Yields are expected to remain range bound and trend lower in the coming months due to the inclusion of Indian bond in JP Morgan's Global Emerging Market Bond Index from June 2024.
Where do you see Indian bond yields in FY25 due to the heavy inflows expected?
We expect 10-year bond yields to trade in the 6.70 to 6.90 band as FII flows are expected to be in the 5-10-year segment. There should be a steepening of the yield curve due to flows in the five-year segment and lower auctions in this segment.
Do you think the RBI will do outright open market operation (OMO) sales of G-secs to cap the free fall in Indian bond yields?
As per the RBI governor, debt flows due to the bond fund inclusion is a double-edged sword. The RBI will be buying dollars to shore up its reserves and may do some OMOs to control liquidity injected due to its forex purchases. However, given that liquidity is expected to be tight, we expect only sporadic OMO sales by the RBI.
Will the RBI be able to manage inflows and outflows due to bond inclusion inflows?
Bond inflows due to the index inclusion are expected to be passive flows, which should have lower volatility. However, active money, which has come in due to India’s macro-economic conditions, can move out if the election outcome is negative or if they get better opportunities in other countries.
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