The RBI MPC kept key rates unchanged and stance at accommodative as expected. However what was interesting to note this time with a new MPC constitution was that the MPC decided to give a "forward guidance" for the stance. Majority of the members with exception of 1 decided to keep the stance at accommodative for the rest of the current financial year and even beginning of next financial year. Thus the stance is as dovish as can be even in the background of inflationary concerns. This is of course because the MPC now accords highest priority to revival of growth and attributes inflationary concerns primarily to supply shocks which are expected to dissipate.
A number of meaningful measures have been taken outside the MPC ambit in the Statement on Developmental and Regulatory Policies. These include OnTap TLTROs for tenor of 3 yrs upto 1 lakh cr with further relaxations for such investments from Large Exposure Framework requirements and permission to hold in HTM. Apart from this limits increased earlier in Sept by RBI for Bank SLR HTM limits have now been extended to march 2022 from march 2021.
The third most significant announcement for the market is the declaration for the very first time by RBI to conduct OMOs in SDLs (State Development Loans). This would help support the expected increase in SDL supply this year due to tax revenue slippages on account of COVID pandemic and slowdown of growth.
All in all RBI continues to keep pressing the accelerator for taking all necessary steps to support growth even while choosing to ignore the recent spikes in inflation.
We expect bond yields to soften post this announcement and prices to rally across gilts, SDLs and corporate bonds. Money market yields are already trading at low levels in the backdrop of ample banking system liquidity and past rate cuts.
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