By Ritika Chhabra
The bond markets were visibly disappointed after the RBI’s monetary policy meeting. While the rate hike of 25bps was on expected lines, markets were also expecting that the RBI will shift its policy stance from ‘withdrawal of accommodation’ to ‘neutral’. With the latest hike, the repo rate now stands at 6.5%. Going by the RBI estimates, the Q4 FY23 inflation is projected at 5.7%. This translates to current real policy rate at 80bps. Moreover, the inflation for FY24 projected at 5.3% makes real rates comfortably in positive territory at 120bps for the coming year. It seemed safe to assume that this will be the last hike in the current rate hike cycle and the governor will convey this message clearly.
RBI: Decisive moderation in inflation
However, the RBI kept doors open for more rate hikes citing the concerns regarding sticky core inflation and maintained its stance to ‘withdrawal of accommodation’. The global inflation is off the boil, much to the cheer of central banks. But the central bankers want to be sure that it does come back to haunt them again. As the RBI governor said ‘We need to see a decisive moderation in inflation’. The same thought was echoed by the Fed chairman, Jerome Powell – ‘The disinflationary process has begun. But this process is going to take quite a bit of time”. In a scenario where global situation remains fluid and policy actions are dependent on incoming data, central bankers don’t want to commit in terms of their policy decisions vis-à-vis inflation forecasts.
What does that mean for bond markets?
India 10 year bond yields hardened 4bps from 7.330 percent to 7.344 percent post the MPC meeting. However, we believe the markets should not be overly concerned about the hawkish tone of the governor. With real rates now in positive territory, the need for incremental rate hikes is limited. In addition, with global growth slowing, the RBI will be cautious about “overdoing” and hence derailing the domestic growth with more aggressive rate hikes. The central bank is most likely to keep the repo rate at current level for extended period of time, than to raise it further, in order to nudge the inflation closer to its target. Hence we expect the 10-year bond yields to trade in narrow range of 7.20% – 7.35% in the near term.
(Ritika Chhabra is an Economist and Quant Analyst at Prabhudas Lilladher. The views expressed are the author’s own and do not reflect the official position or policy of FinancialExpress.com.)