The very first Monetary Policy Committee (MPC) meeting of the new fiscal year was in line with expectations on all essential parameters. The MPC members voted unanimously to retain prices on hold, in line with the marketplace and our expectations. It also reiterated its accommodative stance and moved from time-based guidance to more state-based guidance – this is a welcome move. The Committee noted that it will “continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward”.
What definitely stole the show was the announcement of G-SAP (secondary marketplace G-Sec acquisition plan). Under this plan, the Reserve Bank of India (RBI) will commit upfront to a particular quantity of acquire of government securities, in an try to provide more certainty to bond markets. For present quarter Q1 FY 2022, it has announced G-SAP of Rs 1 lakh crore. This is an essential improvement provided that markets have been gripped with heightened anxiousness with respect to the size of government bond provide.
The RBI also clarified that the G-SAP will run alongside other instruments of the RBI, ie, longer-term repo/reverse repo auctions, forex operations, operation twist, and other OMOs (open marketplace operations). The RBI also announced its selection to conduct VRRR (variable price reverse repo auctions) auctions of longer tenor (earlier 14 days), as a liquidity management operation. While G-SAP aids place a lid on extended-term bond yields, we could see some tiny rise in brief term yields to the extended tenor VRRR (particulars awaited). Thus we could see some flattening of the yield curve from the present levels.
Way forward
Market inhibitions with regard to the mammoth government borrowing plan for now will be place to rest. Today’s measures do not rule out volatility in bond markets, therefore focusing on creating a higher grade portfolio bucketed as per one’s horizon could effectively be a way forward for fixed revenue investors. Switching out of brief/extended duration funds into overnight / liquid funds could just be purchasing peace of thoughts in the kind of decreased volatility, but may possibly not necessarily lead to a greater investment outcome.
The present yield curve steepness (which has priced in fairly a handful of negatives) may possibly not warrant such a move. Any transform in policy path would be gradual, anytime it is effected and we anticipate the RBI to provide sufficient signals to the marketplace concerning the similar and assure orderly evolution of the yield curve. Monitoring international cues are equally essential as we have observed rise in commodity rates stoke worry of inflation. Crude oil is a essential commodity which can steer India’s inflation fortunes fairly meaningfully either way.
Lakshmi Iyer is CIO-Debt & Head-Products at Kotak Mahindra Asset Management Company. These are the author’s personal views.