RBI MPC – No rate hike, but OMO-sales announcement causes yield spike: IIFL Capital Services

9 Oct 2023 , 10:15 AM

The RBI’s MPC continued with its status-quo on rates and stance, as expected. However, RBI announcing its intent of using OMO sales as a tool for managing liquidity led to surge in bond yields. Further, it emphatically stated that the inflation target is 4% and not 2-6% — which was hawkish. The RBI continued to be upbeat about the economic momentum while downplaying the weakness seen in consumption, private investment, rural (especially Agri) and external demand.

RBI and other central banks might pivot on the current hawkish stance, once the massive monetary tightening-led slowdown comes to fore. Analysts at IIFL Capital Services have maintained their below-consensus FY24 GDP growth forecast at 5.8%, while their inflation forecast is broadly in line with RBI.

Status quo on rates and stance

RBI MPC continued its pause on repo rate at 6.5% unanimously — in line with expectations. Accordingly, SDF stands unchanged at 6.25% and MSF rate at 6.75%. The central bank maintained its current stance of withdrawal of accommodation (5:1 majority), citing incomplete transmission to the lending and deposit rates – against 250 bps hike in repo, WALR on fresh loans rose by 196 bps and WADTDR on fresh deposits rose by 233 bps only.

RBI maintains FY24 GDP growth & inflation forecasts; introduces FY25 forecasts

RBI maintained its FY24 GDP growth and inflation forecasts at 6.5% and 5.4% respectively. In its mid-year monetary policy report, the banking regulator introduced its FY25 GDP growth and inflation forecasts at 6.5% and 4.5% respectively. RBI continued to be upbeat about economic momentum downplaying the weakness seen in consumption, private investment, rural (especially Agri) and external demand. On inflation, RBI emphatically stated that inflation target is 4% and not the 2-6% range in which they were operating during the pandemic and even last year — which was hawkish.

Yields surge on OMO announcement; lower yields and softer INR expected nevertheless

The RBI announcing its intent of using OMO sales as a tool for managing liquidity, led to a surge in bond yields. Analysts at IIFL Capital Services were expecting some action to counter the deluge of flows in bond markets, due to the sovereign bond inclusion next year. However, the announcement on OMO sales now, was surprising. Considering the comfortable fiscal position till now, strong domestic and foreign demand for bonds, as also a probable pivot on the current hawkish stance by CBs once the massive monetary-tightening-led slowdown comes to fore — analysts at IIFL Capital Services expect benign yields and softer INR in the 83-84 range.