RBI policy gives short-term support to equities and bonds

The Reserve Bank of India sprung a surprise yesterday when it struck an unexpected dovish tone and refrained from tinkering with key policy rates.
With this, the repo rate was left unchanged at 4% and the reverse repo rate at 3.35% for a 10^th straight policy.
 
The Monetary Policy Committee also decided to continue with the accommodative stance as worry over growth continues to weigh.
The RBI projected 7.8% GDP growth for FY23, which is slightly lower than the 8% to 8.5% GDP forecast made by the Economic Survey 2021-22.
Governor Shaktikanta Das said concerns are arising from the uncertainties related to Omicron and global spillovers.
 
Nonetheless, no immediate threat to liquidity availability and hardening of interest rates resulted in bond and stock prices surging.
The S&P BSE Sensex sprinted 460 points while the NSE Nifty surged 142 points to end at 58,926 and 17,606 levels, respectively.
In the money market, 10-year govt bond yields cooled off over 1% to quote at 6.7%.

But, analysts fear it may be too early to cheer. “RBI expressed a very dovish outlook for inflation for FY23, forecasting it at 4.5%. This comes despite higher oil and commodity prices, growth-supporting fiscal policy, continued economic normalisation, and a distinctly hawkish Federal Reserve. This suggests that the RBI is likely to remain behind the curve, until macro circumstances warrant a shift of gears,” says Aurodeep Nandi, India Economist and Vice-President, Nomura.

Deepak Jasani, who is head of retail research at HDFC Securities, too, believes the RBI’s latest monetary policy may raise concerns that it is behind the inflation curve.

Assuming a normal monsoon, the RBI projected retail inflation for fiscal year 2022-23 at 4.5% with Q1FY23 forecast at 4.9 per cent; Q2 at 5.0 per cent; Q3 at 4.0 per cent; and Q4 at 4.2 per cent.

But analysts worry that inflation risks, especially from fuel prices, remain a concern. If inflation rises more than expected, markets will have to realign quickly, they say.

As regards money market, movement in yields will have to be tracked going-forward.
 
Aditi Nayar, chief economist at ICRA, expect the 10-year yield to cross 7% in April 2022, once the FY2023 borrowing program kicks off.

The RBI also enhanced the Debt-VRR limit from Rs. 1.5 trillion to Rs 2.5 trillion yesterday, expecting higher FPI inflows into India’s debt market.
While this could be an interesting support to the bond market, analysts say the inflows will have to be tracked as the existing limits haven’t been breached.

Overall, the RBI’s dovish policy will provide near-term support to both, equities and bond yields, but global headwinds remain key risks.
On Friday, reaction to the fine-print of the policy, Q3 results, and global markets’ reaction to US inflation data will be the key triggers.
 

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