Views on RBI Policy: Ms. Bekxy Kuriakose, Head - Fixed Income, Principal Asset Management
The rate cutting spree of last five months had lulled most market participants into thinking that perhaps RBI will continue to push the pedal. However by a unanimous vote RBI prudently decided to keep rates unchanged with accommodative stance. No doubt the recent spikes in CPI inflation (April to June) due to cost push pressures was the most important factor to consider. RBI expects that supply chain disruptions will likely remain elevated in the next few months to come. The Governor in his live address took some time to summarize the impact of RBI decisions both conventional and unconventional taken so far which have led to the "lowest borrowing costs" in a decade. The record corporate bond primary issuance of Rs 2.1 lakh cr as mentioned by RBI is also a testimony to this. The other significant achievement he highlighted was the fact that NBFCs now have access to funding at reasonable levels as compared to the immediate post ILFS crisis period.
Relief in the form of developmental measures is being given to MSME borrowers with restructuring being allowed for accounts which were standard as on 1st March 2020. Relief is also being given for households and individuals who wish to borrow against gold with permissible LTV being hiked to 90% from 75% earlier.
Outlook: We think the possibility of further rate cuts is not ruled out but for that to happen CPI inflation needs to show meaningful downward trend closer to 4% which may happen towards latter part of FY 2021. Meanwhile RBI will continue with other measures to aid credit flow to needy sectors and ensure monetary transmission. While a calendar or quantum of further OMOs was not mentioned we expect OMO purchases to continue while being episodic in nature. The disappointment of no rate cut may lead to a selloff of 5 to 10 bps in the near term. We advise investors to maintain a balanced asset allocation within debt funds with short term debt funds being the preferred category.
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