The Monetary Policy Committee (MPC) in its meeting concluded today unanimously voted to keep the
policy Repo Rate and Reverse Repo Rate unchanged at 4.0% and 3.35% respectively. It also voted in
favour of maintaining an accommodative stance as long as necessary to revive and sustain growth on a
durable basis and continue to mitigate the impact of COVID-19 pandemic on the economy, while
ensuring that inflation remains within the target going forward.
In addition to above, RBI announced following measures to support financial conditions
Undertake secondary market purchase through G-SAP 2.0 of INR 1.2 lakh crore in Q2FY22. Further, it
announced conduct of INR 40,000 crore secondary market purchases of Government securities
(including INR 10,000 crores SDLs) under G-SAP 1.0.
Liquidity facility of INR 16,000 crore was provided to SIDBI for on-lending/refinancing through novel
models and structures including double intermediation, pooled bonds/loan issuances, etc. The
facility will be available at repo rate for a period of upto one year.
Liquidity window of INR 15,000 crore with tenor upto 3 years at the repo rates (till 31 March 2022)
to banks for certain contact intensive sectors like tourism, hotels & restaurants, aviation ancillary
services, etc. Banks are expected to create COVID-19 loans portfolio under this scheme and can park
surplus liquidity upto the size of this loan book with RBI at interest rate of 40 bps higher than
reverse repo.
On Economic Growth: RBI revised down its FY22 growth forecast in view of surge in COVID-19 cases
and lockdowns imposed by State Governments. The
growth momentum has visibly slowed down, in RBI’s
assessment, with high frequency indicators like PMIs, Eway bills, electricity generation, port cargo, steel
consumption, cement production etc. recording
sequential moderation. RBI noted that higher spread in
rural areas has resulted in sequential decline of tractors
and 2 wheeler sales. RBI expects growth to be supported
by benign financial conditions and improvement in pace of vaccine rollout. While RBI expects some
impact on urban demand, better adaptation of businesses to work under pandemic should cushion the
impact. Further, forecast of normal monsoon bodes well for growth outlook of rural sector. It also
highlighted that external sector is also favourably placed as improvement in global trade is likely to
support exports.
On Inflation: RBI noted CPI easing to 4.3% in April 2021 mainly on back of favourable base effect. Prices of vegetables and cereals moderated on YoY basis, although fuel inflation surged driven by rise in crude oil prices. Broad based moderation was observed in core CPI also largely driven by base effect. RBI has revised up its inflation forecast slightly recognising the underlying inflation pressure.
On Inflation: RBI noted CPI easing to 4.3% in April 2021 mainly on back of favourable base effect. Prices of vegetables and cereals moderated on YoY basis, although fuel inflation surged driven by rise in crude oil prices. Broad based moderation was observed in core CPI also largely driven by base effect. RBI has revised up its inflation forecast slightly recognising the underlying inflation pressure.
In view of RBI, forecast of normal monsoon and adequate buffer stock bode well for lower food CPI. Further, easing of restrictions, resumption of supply chain and weak demand conditions could temper the core CPI as well. It also pointed out rise in international commodity prices especially crude and logistic cost poses an upside risk.
Conclusion and Outlook
RBI monetary policy was largely in line with market expectations and yields remained in a narrow range. Monetary Policy announcement has potential of infusing additional ~INR 1.5 lakh crore liquidity in the system through G-SAP and other specially targeted liquidity facilities. Thus, financial and monetary conditions are likely to remain benign in the near term. Further, RBI Governor and MPC statement reemphasised its focus on reviving and supporting growth and looking through the risk of marginally higher inflation. In a constrained demand environment as seen in the latest GDP data, RBI feels that the near term upside risks to CPI inflation emanate predominantly from supply side disruption.
Coming to outlook on yields, since the beginning of 2021, multiple domestic and international
developments have resulted in overall environment turning adverse towards bond yields. Some of them
are - surge in crude prices, increase in 10Y US treasury yields, higher than anticipated Government
borrowings, elevated Core CPI, etc. These have put upward pressure on yields, especially at the longer
end of the curve. In our view, most of these factors are likely to persist in near future and could put
further upward pressure on Gsec yields, especially at the longer end of the curve. Additionally, high SLR
holding of banks and signs of broad based improvement in economic activity can also push yields higher.
The risks to shorter end of the curve largely arise from use of longer tenure VRRR operations by RBI,
thereby, reducing the term premia to a certain extent
Despite the unfavourable developments, the rise in bond yields has been muted so far and 10Y yields have risen only ~15 bps since end of December 2020. This was mainly driven by continued RBI intervention through deployment of conventional and unconventional tools. The dovish commentary and future guidance coupled with systematic liquidity infusion done by RBI indicates that these interventions will continue in near future. This should cap any significant rise in yields. Further, comfortable external position, muted credit growth, ample global and domestic liquidity, weakness in growth due to 2nd wave of the COVID-19 pandemic, etc. can pull down the yields further.
In view of the above, we expect yields to trade with a marginal upward bias. Hence, we continue to recommend investments into short to medium duration debt funds, possibly, in a staggered manner in line with individual risk appetite.
Despite the unfavourable developments, the rise in bond yields has been muted so far and 10Y yields have risen only ~15 bps since end of December 2020. This was mainly driven by continued RBI intervention through deployment of conventional and unconventional tools. The dovish commentary and future guidance coupled with systematic liquidity infusion done by RBI indicates that these interventions will continue in near future. This should cap any significant rise in yields. Further, comfortable external position, muted credit growth, ample global and domestic liquidity, weakness in growth due to 2nd wave of the COVID-19 pandemic, etc. can pull down the yields further.
In view of the above, we expect yields to trade with a marginal upward bias. Hence, we continue to recommend investments into short to medium duration debt funds, possibly, in a staggered manner in line with individual risk appetite.
DISCLAIMER
The views are from HDFC Asset Management Company Limited, Investment Managers for HDFC Mutual Fund expressed herein as of June 4, 2021 are based on internal data, publicly available information and other sources believed to be reliable. The source for this document is the second Bi-monthly Monetary Policy Statement, 2021-22, dated June 4, 2021, published by the RBI. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only and is not investment advice. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. HDFC Mutual Fund/AMC is not guaranteeing/ offering/communicating any indicative yields or guaranteed returns on investments made in the scheme(s). Neither HDFC Asset Management Company Limited and HDFC Mutual Fund (the Fund) nor any person connected with them, accept any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
The views are from HDFC Asset Management Company Limited, Investment Managers for HDFC Mutual Fund expressed herein as of June 4, 2021 are based on internal data, publicly available information and other sources believed to be reliable. The source for this document is the second Bi-monthly Monetary Policy Statement, 2021-22, dated June 4, 2021, published by the RBI. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only and is not investment advice. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. HDFC Mutual Fund/AMC is not guaranteeing/ offering/communicating any indicative yields or guaranteed returns on investments made in the scheme(s). Neither HDFC Asset Management Company Limited and HDFC Mutual Fund (the Fund) nor any person connected with them, accept any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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