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Quote on Monetary Policy - Ms. Bekxy Kuriakose, Head - Fixed Income, Principal MF

“As expected the RBI MPC kept key repo and reverse repo rates unchanged and retained stance at “accommodative” with a 6-0 vote. Inflation forecast for H1:2020-21 has been revised upwards by nearly 140 bps (earlier was 4.0-3.8) and now (5.4-5.5). The real GDP growth forecast on the other hand has been revised downwards to 5.5% - 6.00% in H1:2020-21 from 5.9%-6.3% earlier.

The most significant statement in the policy was that policy recognizes that “ there is policy space available for future rate action” and that “persevere with the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target”. This would be recognized by market as a dovish stance.

In the Statement on developmental and regulatory policies, the most important announcement was Long Term Repo Operations for improving monetary transmission. As expected RBI is now increasingly focusing on improving monetary transmission especially wrt bank credit to productive sectors. In the press conference later, the governor indicated that these LTROs of 1 yr and 3 yr maturity wirth Rs 1 lakh crores would be available at the repo rate. This is a bold measure and should definitely help banks to kickstart credit growth in these tenors and help to reduce their cost/improve margins. This measure has led to a sharper rally in the short end of the gilt yield curve post policy where yields have fallen in the 2-4 yr segment by 10 to 15 bps.

Overall policy is positive for debt markets with the dovish stance and LTROs introduced. In the near term lack of fresh supply, expectations of continued Operation Twist would support short to medium gilt yields and corporate bond yields. With ample banking system liquidity money market yields would remain benign.”

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