RBI strikes a balance

Mumbai, Oct 09: The policy decision this time around wasn’t easy, and was indeed tricky for the RBI to find a balance in its policy biases with so many moving pieces. The MPC had a lot to process on domestic and external front. They include incipient weakness in growth indicators, demand-led core disinflationary impulse despite noisy food dynamics, but a still-elusive 4% inflation target, comfortable banking liquidity, easy financial conditions on net, the fluidity of global narratives with global fears of re-ignition of ‘high for long’ scenario, amidst Fed’s massive 50bp cut in Sep and finally, geo-political stress and upcoming US election event risk which could materially disturb Asian FX dynamics, amid ratcheting up of US-China trade war.

Madhavi Arora, chief economist, Emkay says, “Thus, no rate action, in conjunction with stance change to neutral with stress on being 'actively disinflationary' is indeed their best bet to prep ground for start of a shallow easing cycle, possibly but not necessarily from December.”

The Gsec market has rejoiced the stance change and this, in conjunction with announcement of FTSE EMBI inclusion, has led to a 7-8bps rally in 10-yr yield from yesterday’s levels. The Repo-10yr spread has now compressed to 25bps, she said.

Any further rally would be capped till we actually see a commencement of the secular rate cut cycle.

Rajeev Radhakrishnan, CIO - Fixed Income, SBI Mutual Fund says, “The evolving domestic growth inflation outlook clearly was apt for a change in the monetary policy stance to neutral. While remaining cognizant of emerging risks on the inflation outlook, the neutral stance provides more flexibility to address evolving macro dynamics.

From a near term perspective, the policy focus would likely remain attuned to address the skewness in system liquidity and any potential financial stability risks.