RBI’s decision to keep interest rates & stance unchanged has come as a respite to bond prices, say market experts

RBI Governor Shaktikanta Das’s announcement on not changing interest rates has come as a big boost to bond prices and is a ‘much needed respite’, say market experts. RBI governor, on Thursday morning, said that the monetary policy committee (MPC) voted unanimously to keep repo rates unchanged at 4 per cent and continue with an accommodative stance as long as necessary. 

While the RBI did not announce any direct support for government bonds amid a record borrowing program, it signaled that it would continue to support the orderly evolution of the yield curve. “It is expected that market participants will engage responsibly,” Das said.

Effect on Bond Market

Also, RBI’s decision to not change the rates or stance has come as a big boost to bond prices and is a ‘much needed respite’. Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund, said, “The perfect V-day gift to bond markets was delivered today. No change in rates or stance is a big boost to sagging bond prices and a much needed respite. FY 2023 inflation forecasts at 4.5 per cent also seems absolutely fine for yield. This coupled with the current liquidity situation calls for anchoring of bond yields and expect positive sentiment to revive in bond markets in near term.”

Nitin Shanbhag, Executive Group Vice President – Investment Products, Motilal Oswal Private Wealth, said, “Although bond yields will take a breather for now, with the RBI continuing on the path to normalization, we maintain that the yield curve is likely to flatten going forward. Hence, for core fixed income allocation, a barbell approach, i.e., having core allocation to high quality accrual oriented funds with short maturities (3-5 years), complemented by 20-30 per cent allocation towards long maturity and high quality roll down strategies, would remain the preferred strategy.”

Rebalancing liquidity

RBI governor has said that the central bank has turned to rebalancing liquidity on a dynamic basis. The central bank has taken “quick and decisive” steps to ease liquidity constraints, restore market confidence and prevent contagion to other segments of the financial market, he said. The RBI governor announced four steps: First, variable rate repo operations of varying tenors will henceforth be conducted as and when warranted. Second, variable rate repos and variable rate reverse repos of 14-day tenors will operate as the main liquidity management tool. Third, these operations will be aided by fine turning operations. Fourth, with effect from March 1, the fixed rate reverse repo and Marginal Standing Facility will only be available from 5:30-11:59 PM on all days. Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank, said, “RBI may want to use overnight VRRRs to bring the overnight rates closer to repo rate even before the fixed reverse repo hike.”

“RBI has been proactively managing liquidity through VRRRs and there are no concerns on the liquidity side. Overall, the commentary on economic growth, increasing strength of PSU banks’ balance sheet, financial stability and liquidity is quite positive and RBI has reconfirmed its commitment to protect domestic markets from the impact of global macroeconomic events. The Indian market is expected to respond positively to RBI’s announcements,” said Mohit Ralhan, Managing Partner, TIW Private Capital group.

Meanwhile, Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank Ltd, said, “The RBI has signaled that it will continue to support economic growth as long as required. Policy outlook is stable but the narrative is slightly different from what the markets had expected. MPC’s key mandate is to keep inflation within its target band of 4 per cent to provide the necessary liquidity support for sustained domestic recovery. With RBI sending dovish signals, interest rates are likely to be stable in the short-term and RBI is likely to adopt a calibrated approach.”

RBI Governor Shaktikanta Das’s announcement on not changing interest rates has come as a big boost to bond prices and is a ‘much needed respite’, say market experts. RBI governor, on Thursday morning, said that the monetary policy committee (MPC) voted unanimously to keep repo rates unchanged at 4 per cent and continue with an accommodative stance as long as necessary. 

While the RBI did not announce any direct support for government bonds amid a record borrowing program, it signaled that it would continue to support the orderly evolution of the yield curve. “It is expected that market participants will engage responsibly,” Das said.

Effect on Bond Market

Also, RBI’s decision to not change the rates or stance has come as a big boost to bond prices and is a ‘much needed respite’. Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mutual Fund, said, “The perfect V-day gift to bond markets was delivered today. No change in rates or stance is a big boost to sagging bond prices and a much needed respite. FY 2023 inflation forecasts at 4.5 per cent also seems absolutely fine for yield. This coupled with the current liquidity situation calls for anchoring of bond yields and expect positive sentiment to revive in bond markets in near term.”

Nitin Shanbhag, Executive Group Vice President – Investment Products, Motilal Oswal Private Wealth, said, “Although bond yields will take a breather for now, with the RBI continuing on the path to normalization, we maintain that the yield curve is likely to flatten going forward. Hence, for core fixed income allocation, a barbell approach, i.e., having core allocation to high quality accrual oriented funds with short maturities (3-5 years), complemented by 20-30 per cent allocation towards long maturity and high quality roll down strategies, would remain the preferred strategy.”

Rebalancing liquidity

RBI governor has said that the central bank has turned to rebalancing liquidity on a dynamic basis. The central bank has taken “quick and decisive” steps to ease liquidity constraints, restore market confidence and prevent contagion to other segments of the financial market, he said. The RBI governor announced four steps: First, variable rate repo operations of varying tenors will henceforth be conducted as and when warranted. Second, variable rate repos and variable rate reverse repos of 14-day tenors will operate as the main liquidity management tool. Third, these operations will be aided by fine turning operations. Fourth, with effect from March 1, the fixed rate reverse repo and Marginal Standing Facility will only be available from 5:30-11:59 PM on all days. Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank, said, “RBI may want to use overnight VRRRs to bring the overnight rates closer to repo rate even before the fixed reverse repo hike.”

“RBI has been proactively managing liquidity through VRRRs and there are no concerns on the liquidity side. Overall, the commentary on economic growth, increasing strength of PSU banks’ balance sheet, financial stability and liquidity is quite positive and RBI has reconfirmed its commitment to protect domestic markets from the impact of global macroeconomic events. The Indian market is expected to respond positively to RBI’s announcements,” said Mohit Ralhan, Managing Partner, TIW Private Capital group.

Meanwhile, Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank Ltd, said, “The RBI has signaled that it will continue to support economic growth as long as required. Policy outlook is stable but the narrative is slightly different from what the markets had expected. MPC’s key mandate is to keep inflation within its target band of 4 per cent to provide the necessary liquidity support for sustained domestic recovery. With RBI sending dovish signals, interest rates are likely to be stable in the short-term and RBI is likely to adopt a calibrated approach.”