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June 2013

The recent external sector developments which highlighted the risks surrounding capital flows in an environment of probable changes in global central bank policies weighed in on the RBI policy stance. The policy statement continues to stress on supply side initiatives to revive growth and concerted efforts to arrest the persistence of food price inflation. The RBI has also acknowledged the positive fiscal policy developments ,which if sustained could lower the risks on the twin deficits and also revive investor confidence.

Overall the policy action was on expected lines, with the markets having repriced expectations following the INR moves over the last few weeks. The policy guidance does not explicitly signal a more cautious tone from earlier guidance as the RBI is increasingly likely to factor in developments affecting the stable funding of the Current account deficit for the sequencing of additional easing. Market positioning and absence of any comments regarding the constraints of additional easing which found a mention in previous policy statements have resulted in bond markets positively reacting to the event.

We anticipate that  the domestic growth inflation outlook remains favourable for  potential additional easing over the coming months. In the interim, the developments relating to the external sector and global developments may continue to impart volatility. We have lightened Gsec positions in our duration funds in anticipation of volatility induced by the external sector. This was a tactical call though we remain positive on bond yields from a medium term perspective given the growth-inflation and demand-supply dynamics.