First RBI Meeting of FY'23
The RBI's first policy meeting of this financial year led stock markets higher but bond traders clearly did not like what they heard.
Interest rates remain unchanged for now, with the repo rate at 4% and the reverse repo rate at 3.35% (for the 11th time in a row). And this was unanimously voted for by the Monetary Policy Committee (MPC).
Even the RBI's stance, which indicates how they might act going forward, remained "accommodative". But Governor Das did say that there will be a focus on withdrawal of accommodation to ensure inflation doesn't run out of control. And these are key words bond markets are paying particular attention to - "withdrawal of accommodation"
They cut growth projections for this fiscal year though, 7.2% from 7.8% earlier, and the inflation forecast was bumped up to 5.7% from 4.5%.
Naturally, the inflation numbers are subject to being revised based on geopolitical developments in Russia and Ukraine, as the price of crude oil is a key factor.
For controlling liquidity in the financial markets, the RBI introduced a new tool called the Standing Deposit Facility (SDF), and also adjusted the Liquidity Adjustment Facility (LAF) corridor to 50bps, the same as pre-Covid times.
The SDF and LAF are somewhat complex tools used but the RBI to manage the plumbing of our financial system. We won't go into detail here, but if you're interested, do check out this article by CNBCTV18 that explains stuff nicely.
The tone of the policy overall was perceived as hawkish by investors and fund managers, and the 10 year government bond yields jumped above the 7% mark for the first time in a long time.
The debt products CIO at Kotak AMC thinks that this policy was used to lay the base for tightening rates in the coming months and expects bond yields to rise going ahead.