“RBI MPC surprised market by keeping key rates unchanged even while the stance remains unchanged as “accommodative”. Important to also note that all members of MPC voted in favour of the decision. I would term this policy decision as bold and perhaps a fallout of the “Onion price” effect. However the RBI MPC has noted that food inflation has gone up across several categories not just few and hence their concern is valid. Added to it household inflation expectations have jumped up sharply across 3 month and 12 month period. To some extent spending has remained subdued due to increase in prices, the MPC notes in its policy document thereby acknowledging the complex chain of cause and effect wrt spending and inflation. The RBI MPC also wants the full effect of past rate cuts of 135 bps to play out in terms of transmission to bank lending rates which remains an area of disappointment.
Among the Developmental and Regulatory Policies, much needed guidelines to regulate the functioning of Urban Cooperative Banks will come in finally in the wake of the PMC crisis. This is a welcome step.
Post policy announcement, gilt yields have risen sharply. The ten yr benchmark yield is trading at 6.58% compared to 6.46% levels just prior to policy. We remain cautious on account of risk of fiscal slippage and continuous supply of government bonds in the primary market. Ample banking system liquidity will ensure money market rates remain benign inspite of no rate cut. We would advise investors to stick to a balanced asset allocation in debt funds.”