Quick view -
RBI monetary policy action
* RBI raises reverse repo rate by 50 bps to 4.5% and the repo rate
by 25 bps to 5.75%. There by narrowing the corridor to 125 bps from 150 bps.
I had written about this in my june note. It makes imminent sense. We expect
a further narrowing to 100 bps by the next review.
* No change in CRR - as expected - as liquidity remains tight
* Inflation target raised to 6% . RBI seems hawkish, worried on
inflation. We still view the RBI as 'behind the curve' on inflation
management. They were hoping on food inflation to fall - which has clearly
not happened. And now, capacity tightness is leading to a generalized
inflation.
* They will keep liquidity tight - till inflation falls below 7%.
* Banks will have to increase deposit rates to meet the robust
credit growth - under way. Lending rates might not increase by much.
* Short term rates will remain at the current levels or increase
slightly by 20/25 bps. This is good for liquid funds, but negative for other
funds due to the MTM rule.
* Long bonds will take cues from credit growth - if credit growth
remains high - we could see 10 year at around 8% from current - 7.65%
* We expect inflation to ease to 7% by December.
Arvind Chari
Sr. Fund Manager - Fixed Income
Best Regards
Millet Bobin
Sales Manager
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