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March 2013

RBI's Monetary Policy Views

In line with market expectations, RBI cut the repo and reverse repo rate by 25 bps while keeping CRR and SLR unchanged. Monetary easing is warranted given the sharp moderation in growth and core inflation, however, sticky consumer price inflation, high current account deficit and fall in savings rate have made the headroom for RBI quite limited. Overall the policy guidance and outlook, stresses on the fact that growth revival would depend more on continuation of fiscal reforms, supply enhancing measures, improved governance on project implementation and efforts to revive investments with monetary policy role being quite limited. We believe that soft global commodity prices, output gap, lag effect of tight monetary policy and fiscal correction will lead to softer inflation and lower current account deficit going forward. 

We expect further monetary easing of 50 bps in policy rates while continuance of liquidity support in the form of Open market operations. The borrowing program for 1HFY 14 was better than expected and with support in the form of OMOs, bond yields will continue to remain range-bound for the time being. 

We have lightened duration in our fixed income funds by reducing Gsecs and have positioned at the short end of the corporate curve which offers better relative value at this point in time.