The Monetary Policy Committee unanimously voted today (6-0) for a rate cut of 25 bps and a change in stance from 'neutral' to 'accommodative'. The rate and stance easing were helped by RBI's assessment of downward revision in GDP to 7.0 for FY 20 (by 20 bps over the earlier forecast) and a lowering of the upper end of the inflation band by 10 bps to 3.7% by March 2020. Given that the one year forward CPI forecast is well under the medium term CPI target of 4%, the policy tone was distinctly accommodative and pro-growth.
Recent rounds of liquidity infusion both through OMOs and INR - USD swaps have started reflecting in easing liquidity conditions causing the average daily surplus in June to turn positive to the tune of INR 660 bio. The MPCs assessment of a distinct weakening in growth conditions, slow-down in investment activity, fall in consumption and expected inflation trajectory remaining below the target are all positives for yields in the near to medium term.
The yield curve which has already witnessed a fair amount of steepening is likely to continue some more in our view, aided by the extremely positive comments on liquidity. Given this backdrop, the short (1-3 years) and medium term funds (2-5 years) continue to look very attractive. Some allocation to Dynamic bond funds could also be considered to take advantage of fall in long end (7-10 years) yields as well.