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RBI MPC Oct'20 meeting review - No rate cut but longer end to remain supported
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The Monetary Policy Committee decided to keep rates unchanged whilst maintaining its ‘accommodative’ stance to stimulate growth in the economy. The speech by the governor highlighted how growth has begun to return to the economy despite the challenging environment. The MPC has retained its dovish stance evident through the bevy of policy actions taken today sans a rate cut. Commentary also indicated that we are unlikely to see rate hikes at least till the second half of FY22.  

The following announcements were notable:

(a) On Tap LTRO – Rs 1 lakh crore T-LTRO linked to policy rate will be available to banks for a tenor of 3 years to lend to specific sectors

(b) Extension of dispensations for SLR Holdings by Banks – Earlier in Aug-20 MPC meeting, the RBI had provided an additional dispensation to banks to increase their HTM holdings of SLR compliant securities to 22% till March 31st 2021. The MPC has decided to increase the dispensation period by an additional year to March 31st 2022. Given the fiscal pressures and the steep borrowing calendar of the government, this action releases much needed headroom for bond demand.

(c) OMO in SDL’s – The RBI will now conduct OMO’s in state government securities to improve the liquidity and facilitate efficient pricing. The action will be positive for SDL’s across our portfolios.

(d) Rationalization of Risk weights for Housing Loans: The change in risk weights is likely to provide a much needed boost to the real estate sector  

  
Conclusion:

RBI commentary, policy action through OMO’s and devolving G-Sec issuances are a clear indication that RBI intends to keep rates range bound. The end of the rate cut cycle, also signals the end of the capital gains story across most of the fixed income space especially G-Sec/AAA assets. From here on, we believe investors will be best suited to go up the duration curve which would serve investor needs of a higher risk reward.

We anticipate the RBI will maintain rates at current levels for the next 12-18 months’ post which we believe a gradual rising rate environment will ensure on the back of a recovery in the economy. The RBI has continued open market operations i.e. ‘Operation Twist’ to normalize the curve. The action has borne fruit as we see a gradual retracement across the corporate & G-Sec curves. Under these circumstances, we believe the longer end of the curve will likely remain anchored at current levels. 
 
 

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