NATIONAL, 6^th OCTOBER, 2023 (GPN): Edelweiss AMC express it’s views on RBI MPC October 2023-

RBI Policy – October 2023

Policy Highlights:

1. As expected, MPC voted 6-0 to keep the policy rate unchanged.
2. The MPC voted 5-1 to maintain the policy stance to “withdrawal of the accommodation…”
3. It is the 4th consecutive meeting in which MPC has maintained the status quo on rates.
4. Today’s policy outcome was non-event on most counts.
5. On growth, the MPC highlighted the ongoing events and their negative impact on global growth butmaintained India’s FY24 GDP growth at 6.5% citing resilient & strong domestic demand conditions –especially potential revival in rural demand in the upcoming festival season.
6. The MPC was satisfied with the overall improvement in India’s twin balance sheets – Banks and
   Corporate India, that will support the credit growth going forward.
7. On Inflation, the RBI Governor highlighted the role of vegetables (6% weight in CPI basket) in July 2023 and August 2023 inflation readings and saw a fleeting impact in the September CPI reading as well.
8. That said, MPC was happy to note a ~140 basis-point fall in the core CPI from its peak in Jan 2023 and
   inflation expectations survey indicating consumer inflation expectations in the single digit for the first time since the COVID-19 crisis.
9. The MPC maintained its average FY24 CPI forecast unchanged at 5.4% with marginal tinkering in its
   Q2FY24 and Q3FY24 inflation expectations.
10. The MPC also expressed concerns about the food price inflation and expects it to remain sticky.
11. The RBI Governor assured the market that the monetary policy remains “absolute ready” to react to any unexpected changes in inflation dynamics and that price stability is “non-negotiable” for MPC.
12. Surprisingly, there was hardly any mention of the recent spike in crude oil prices and its potential impact on India’s growth-price dynamics.
13. On Liquidity, the RBI Governor expressed concerns about the risk of excess liquidity on financial stability.
14. He also highlighted the uneven distribution of liquidity within Indian banks.
15. The RBI Governor observed that the average term spread (10Y – 91D T-Bill) at ~41 bp suggested stable financial conditions.
16. That said, his mention of the use of Open Market Operations (OMO) sales to modulate liquidity caused
    consternation among bond market participants.
17. Bond prices reacted negatively with the benchmark 10Y IGB yield spiking by ~8 bp to 7.298% after the speech.
18. We believe this may be an over reaction as the current banking system liquidity is balanced and unlikely to show any significant surplus ahead of the festival season and seasonal tax outflows.
19. We expect RBI to resort to OMO sales to sterilize liquidity only once the FPI inflows commence in the bond market in CY24 and durable liquidity goes above the comfort zone of the RBI.

EDELWEISS AMC VIEWS:

1. India’s sovereign bonds have relatively outperformed global peers in CY23 amid the recent hardening of the UST yields.
2. Indian government bonds have exhibited a lower correlation with their regional and global peers in terms of their yield movement.
3. India’s economic fundamentals remain strong. The government’s ongoing fiscal consolidation is likely to make a case of a sovereign rating upgrade. This is reflected in the tightening of the spread between India’s 10Y IGB and 10Y UST yields.
4. At ~7.30%, the benchmark 10Y IGB yield is close to its upper band of the trading channel. We expect it
   to trade between 7.35% and 7.20% range from a technical perspective.