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RBI’s credit policy leaves markets surprised

Experts and senior economists of different BFSI entities opine that the accommodative stance, though retained by the RBI this time, will gradually change. They make interesting reading about the decisions of RBI’s MPC announced on Friday.

Madan Sabnavis, Chief Economist, Bank of Baroda: “The credit policy has surprised the markets with aggressive changes in projections for both GDP and inflation. For GDP growth it is 7.2% (BoB: 7.4-7.5%), while inflation has been increased to 5.7% (BB: 5.5-6%). There is a clear hint that the accommodative stance though retained will change as there will be a gradual withdrawal of liquidity keeping in mind the trends in inflation. The interesting introduction of the SDF notwithstanding the high level of bonds held by RBI does indicate that the overnight reverse repo will no longer be attractive as the SDF gives higher return. These are clear indications of the repo rate being increased during the year and we do expect at least a 50 bps increase this year. The markets have already reacted with the 10-year bond going up past 7% and we expect the rate to go up to 7.25% this year.” 

Rajeev Radhakrishnan, CIO-Fixed Income, SBI Mutual Fund: “The April review is decidedly more nuanced and cautious in the assessment and guidance with the RBI acknowledging upside risks on inflation and taking measured steps to exit from the extremely accommodative policy stance. A key change has been the shift in the LAF corridor by instituting the Standing Deposit Facility at 3.75%. The reverse repo rate has effectively been deemphasised. Effectively these changes along with the gradual unwinding of durable liquidity as announced, should push the effective overnight market rates closer to 3.75% as against 3.35% so far and lead to a corresponding alignment in other short end segments. With no GSAP support announced, market demand-supply dynamics should guide the yield curve even as the RBI could step in if market conditions turn disruptive.”  

Aditi Nayar, Chief Economist, ICRA: “As we had expected, the 10-year G-sec yield breached 7% after the policy announcement. We anticipate the 10-year yield to rise to as much as 7.4% over the course of H1 FY2023, as the market’s views on the number and timing of rate hikes crystallise. Even as the Governor hinted at utilizing various tools to manage the government borrowing programme, comments on the yield curve being a public good were missing in his morning speech, suggesting that yields will be allowed to move up gradually. 

Our assessment suggests that the estimates of tax revenues made in the FY2023 BE are rather conservative considering the substantial overshooting that has taken place in FY2022. This offers space for a rollback in excise duties back to the pre-pandemic levels, to prevent excessive tightening of policy rates as well as the household budgets and corporate margins.” 

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra AMC: “The policy has introduced SDF at 3.75%, this effectively means the overnight rates will have a floor of 3.75% (rise by 40bps). This policy, in some sense, is a Segway to tightening policy rates in the coming months. Expect yields to rise across the curve.” 

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank: “RBI has shifted towards hawkishness acknowledging the increasing upside risks to inflation. The withdrawal of accommodation tilt is clear by the normalisation of the effective policy corridor to pre covid levels of 50bps. We expect the MPC to change the policy stance to neutral in the June policy. The repo rate hikes will follow from August. We see 50bps repo rate hike in FY23”. 

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