In line with market expectations, the RBI has kept the repo rate unchanged at 5.15% in its monetary policy meeting today.
Market participants were expecting no cut in repo rate since inflation has witnessed a sharp uptick in past two months.
Retail inflation, measured by year-on-year changes in the CPI, surged from 4.6% in October to 5.5% in November 2019 and further to 7.4% in December 2019, the highest reading since July 2014. The central bank has now revised its CPI inflation projection upwards to 6.5% for Q4 of FY 2019-20.
Turning to the growth outlook, RBI revised its GDP growth for FY 2020-21 to 6%.
The MPC decided to continue with the accommodative stance, which means a rate hike is off the table. The central bank said that it would continue with the accommodative stance “as long as” it is necessary to revive growth, while ensuring that inflation remains within the target.
Post RBI policy, fund managers feel that short duration funds stand to benefit the most after the RBI policy. This is because the central bank has announced to introduce LTRO (long-term repo operations) of 1-year and 3-year tenor to improve monetary policy transmission.
In LTRO, RBI will offer funds at repo rate of 5.15%. As a result, the yield on G-secs with corresponding tenors will fall closer to the benchmark repo rate. Simply put, following the move yield on the short-end of the curve will come down.
Bekxy Kuriakose, Head - Fixed Income, Principal MF says that the most important announcement was Long Term Repo Operations for improving monetary transmission. This measure has led to a sharper rally in the short end of the gilt yield curve. Post policy, yields have fallen in the 2-4 year segment by 10 to 15 bps.
“Overall policy is positive for debt markets with the dovish stance and LTROs introduced. In the near term lack of fresh supply, expectations of continued Operation Twist would support short to medium gilt yields and corporate bond yields. With ample banking system liquidity money market yields would remain benign,” Bekxy noted.
R Sivakumar, Head - Fixed Income, Axis MF said that the introduction of LTRO will add durable liquidity to the 1-3-year segment and intends to push down rates further in this segment.
With the announcement of LTRO, some fund managers now expect an end to ‘Operation Twist’ which was another tool to balance the yield curve.
Arvind Chari, Head Fixed Income, Quantum MF said, “LTROs are beneficial for short term bond yields and (1-3 year) lending rates. It might put an end to Operation Twist, and the bond market is reflecting that with the fall in short term government bond yields of almost 10-15 bps and the longer end (10 year and above) almost flat after the decision.”
