RBI’s no change policy hints at rate hike ahead

He expects 10-year G-Sec to trade in the 6.20-6.40 per cent range in the near term.

The equity market cheered RBI's stance and buying was seen following the policy statement, but the bond market was not buying RBI's inflation projection. India 10-year bond yield hit 6.32 per cent, highest in last 18 months.

RBI said it sees inflation to be within the mandated 4±2 per cent range in the next few months. It has projected the CPI inflation at 5.7 per cent during 2021-22: 5.1 per cent in the second quarter, 4.5 per cent in third, and 5.8 per cent in the fourth, with risks broadly balanced. CPI inflation for the first quarter of 2022-23 is projected at 5.2 per cent. It also maintained its FY22 GDP growth guidance at 9.5 per cent.

“With greater restraint on the inflation front, the MPC has decided to support growth by continuing with status quo. With growth concerns continuing in the contact-intensive sectors and with the commercial credit by the banking system continuing to be tepid, we do not expect policy reversal in the immediate future,” said M Govinda Rao, Chief Economic Advisor, Brickwork Ratings.

But some see a rate hike by the February meeting. Morgan Stanley has also projected at least four rate hikes in Calendar 2022, starting in February.

“We do not see RBI in a hurry to normalise liquidity conditions as well as the reverse repo rate in the near term. We continue to see the February policy as the earliest period of review for RBI to narrow the policy rate corridor by raising the reverse repo rate,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.

The presentdicision of RBI's MPC does not require any immediate action by the investors as analysts and fund managers believe they should stick to short and medium-term products.

“We advise investors seeking asset allocation to fixed income to retain the short/mid products viz. Corporate bond and Banking & PSU fund categories. There could be some allocation to the Dynamic bond category depending on their appetite to handle yield volatility. Investors with a shorter horizon (upto 1 year), should allocate to the Ultra Short and Low Duration Funds,” said Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund.

On the equity front, experts said that the backdrop of low interest rates amidst the festive season should push consumption in housing and its ancillary sectors. “We remain positive on stocks such as HDFC, CanFin Homes, and large banks such as SBI, ICICI Bank,” he said.