What mutual fund managers say about RBI policy

The Reserve Bank of India (RBI) kept its key policy rates – repo and reverse repo – unchanged at 6.50 per cent and 6.25 per cent respectively in its fifth bi-monthly monetary policy. The decision was in line with the expectations in the money market. Here’s how fund managers reacted to it.

Pankaj Pathak, Fund Manager - Fixed Income, Quantum Mutual Fund
The policy status quo was in response to the softer inflation trajectory and sharp drop in crude oil prices. However by keeping the policy stance as “calibrated tightening”, the RBI has maintained their cautious approach over the future inflation trajectory considering the volatile nature of food inflation and uncertain demand supply dynamics in the crude oil market. The market will very closely watch the food and fuel prices to determine the RBI’s next move.

In our opinion the RBI will remain on an extended pause on policy rates and OMOs could continue for few more months. Given the increased macroeconomic uncertainty, we advise investors to remain cautious about the interest rate and credit risk in their debt fund portfolio and focus on short duration (short maturity bonds) and good credit quality funds only.

Kumaresh Ramakrishnan, Head - Fixed Income, DHFL Pramerica Mutual Fund
On expected lines, the MPC maintained rates at 'status quo' while leaving the stance unchanged. Beside the sharp reversal in global macro from falling oil, underpinning the dovish policy tone was a reduction in inflation forecast for the next 12 months to under 4%, influenced in a large part by benign food prices. Seen together with Q2-FY 19 GDP growth which exhibited softness and is likely to taper down further, the 6-12 month rate outlook appears to be a 'pause'. A reversal in stance to 'neutral' can be expected if the macros consolidate along the way. Broadly the policy is 'neutral' for bond markets, though retains a positive bias, even as a progressive cut in SLR by 1.5% to 18% can reduce demand for Govt bonds in the near term.

Lakshmi Iyer, CIO -Debt & Head-Product at Kotak AMC
The market had already factored the possibility of a status quo. All in all this looks like a good policy without a stance change. A small section of the market had it in the mind that there will a stance change. Inflation is projected at 2.7-3.2 per cent which is almost one percent point lower than earlier. I think we have to observe some more data points before we jump into the rate cut wagon.

The chances of a rate hike are negligible now. The crude oil prices are down 30 per cent. Even if the prices rebound 30-50 per cent, the financial year would be over. The probability of a rate hike is out of the window at this point.

Dheeraj Singh Head of Investments- Taurus Asset Management
Surprisingly, RBI has lowered their forecast for inflation in the second half of the current financial year to 2.7 per cent to 3.2 per cent and 3.8 per cent to 4.2 per cent in the first half of 2019-20.

The lower than expected inflation print witnessed recently seems to have surprised the committee members and they probably view this as an aberration and therefore have maintained their “calibrated tightening” stance. However, this doesn’t gel with their significantly lower inflation forecasts.

It appears that the committee seems to be preparing itself to return to a “neutral” stance on monetary policy in the near future, possibly as early as February.

Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund
The RBI MPC kept key repo/reverse repo rates unchanged as expected and also maintained the stance at “calibrated tightening” with one dissenter Dr Dholakia who wanted change to neutral stance. Expectedly while MPC notes the recent softening in headline CPI inflation, fall in crude oil prices and weakness in global economic activity, MPC remains cautious of inflation ahead and also highlighted fiscal risks. The inflation forecast for H2 2018-19 has been reduced to 2.7-3.2 per cent from 3.9-4.5 per cent in previous Oct policy. Growth forecasts have been broadly kept unchanged.

Under Developmental Polices of the RBI, one of the key developments is that RBI has decided to reduce the SLR in quarterly phases of 25 bps till it reaches 18 per cent (currently 19.5%) of NDTL. This is to align the SLR with LCR requirements.

Overall the policy is on expected lines and looking ahead we do not expect a rate hike in remaining period of FY19. Barring any adverse movement in crude oil prices, rupee or food prices RBI is expected to be on pause mode for a long period. Gilt yields have fallen post today’s announcement. Ability of the government to meet the fiscal deficit target remains a key risk for markets.