Raghuram Rajan’s Monetary policy review unlikely to push bond market

By: | Updated: August 8, 2016 4:42 PM

The Reserve Bank of India's third Monetary Policy Review for the current fiscal is unlikely provide any incremental positive impact on the bond market, feels India Ratings and Research. It expects RBI Governor Raghuram Rajan to keep rates unchanged on Tuesday.

RBI releases norms for 'on tap' Universal Bank licencingAccording to the agency RBI may start allowing AAA-rated corporate bonds in the liquidity adjustment facility window. (Reuters)

The Reserve Bank of India’s third Monetary Policy Review for the current fiscal is unlikely provide any incremental positive impact on the bond market, feels India Ratings and Research. It expects RBI Governor Raghuram Rajan to keep rates unchanged on Tuesday.

India Ratings, however, says that the inflation-targeting and the moves to form a Monetary Policy Committee (MPC) might have a greater impact on the debt market. “There were two critical developments the previous week, which are more important in shaping the RBI’s rate decision. Firstly, the government outlined its 4 per cent inflation targeting framework (plus or minus 2 per cent) over the next five years. The second development is the likely formation of the monetary policy committee (MPC).”

Ind-Ra believes the formalisation of the inflation-targeting framework with a fixed timeline as well as MPC formation will reduce the individualistic approach in the rate-setting process. However, the governor will be free to determine the desired ex-ante real interest rate, which can allow manoeuvring room to set the policy rate.

The rating agency expects liquidity to remain comfortable for August 2016. RBI’s planned transfer of surplus funds to the government (around Rs 65000 crore) in mid-August will balance any additional money requirements. Additionally, liquidity conditions will stay comfortable given the Rs 38000 croore worth of G-sec redemption slated for mid-August. The agency believes RBI will be in short-term sterilisation mode, balancing surplus short-term liquidity and the onset of the maturity of foreign currency non-resident deposits (FCNR (B)).

According to the agency RBI may start allowing AAA-rated corporate bonds in the liquidity adjustment facility window. This will encourage banks to move into the asset market for lending and will strengthen corporate bond markets.

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