FINANCIAL VIEWS BY SAMPATH REDDY(CIO, BAJAJ ALLIANZ LIFE INSURANCE)
As expected, the RBI Monetary Policy Committee (MPC) kept the policy repo rate unchanged (with all MPC members unanimously voting for the same). It also kept the monetary policy stance unchanged at “calibrated tightening”, although one MPC member voted to change the stance back to “neutral”.
Given that CPI headline inflation came in below expectations recently, the central bank cut its inflation forecasts substantially. The headline inflation forecast for H2 FY19 has been cut from 3.9-4.5 percent in the October policy review to 2.7-3.2 percent now, while the forecast for H1 FY20 has been cut to 3.8-4.2 percent now (compared to a forecast of 4.8 percent for Q1 FY20 in the October policy review).
However, with the downward revision in inflation trajectory, RBI has highlighted some upside risks and uncertainties, such as a possible reversal in unusually low prices of certain food items (especially perishable items), uncertainty about MSP’s impact on inflation, an uncertain medium-term outlook for crude prices, volatility in global financial markets, and fiscal slippages at centre/state level.
On the economic front, despite the recent Q2 FY19 GDP numbers coming in below expectations, the central bank retained its GDP forecast for FY19 at 7.4 percent — with risks somewhat to the downside.
Market Outlook
The overall tone of the policy was a bit dovish, with inflation forecasts being cut substantially. The bond markets reacted positively, and the 10-year yield closed at 7.44 percent, down 13 bps from Tuesday’s close.
RBI also announced that starting 2019, Statutory Liquidity Ratio (SLR) will be cut by 25 basis points every quarter until it comes down to 18 percent.
Although this will reduce appetite for government securities from banks, who are presently sitting on excess SLR, it will be beneficial for banks because they will have a buffer to lend more — thereby benefiting credit growth.
Also, the RBI governor indicated that if upside risks (mentioned in the policy) do not materialize, then it could open up space for future policy action—therefore keeping it data dependent.
We had increased duration in our portfolios over the past month, and with yields having already factored in the outcome of the policy, we now prefer the shorter to medium term segment of the yield curve.
(The author is Chief Investment Officer, Bajaj Allianz Life Insurance. The views and investment tips expressed by investment expert on digitalworldeconomy.com are his own and not that of the website or its management.)
