SAMPATH REDDY, Chief Investment Officer, Bajaj Allianz Life Insurance Company talks about Repo rate cut
6 June 2019 :
The RBI MPC cut policy rates by 25 bps–along expected lines. And on a positive note, the RBI MPC unanimously voted for a change in policy stance from ‘neutral’ to ‘accommodative’. This dovish undertone is also being reflected in bond yields further softening post the policy announcement. The RBI also said that it has set up a committee to comprehensively review the liquidity management framework by mid-July, and this will be important for transmission of the rate cuts in the system. The RBI governor commented that partial transmission of the earlier cumulative 50 bps rate cut has happened at a slightly faster rate than previously. However, the pace of transmission will be dependent on the liquidity environment, credit conditions, and also considering the relatively elevated credit to deposit ratio (with deposit growth lagging credit growth).
On the economic front the RBI acknowledged the global and domestic growth slowdown and cut the GDP growth forecast for FY20 to 7.0% from 7.2% earlier. However, on a positive note the governor added that the central bank is ready to support growth concerns to aid aggregate demand and private investment. We had earlier also commented that with inflation well below its target, the central bank’s focus will shift more from inflation to supporting domestic economic growth—and this statement by the governor seems along expected lines.
The governor indicated that the central bank is closely monitoring the stress in the NBFC/HFC sector, and will not hesitate to act in case of any financial instability.
From an investment perspective the sharp fall in bond yields over the past month has benefited duration and bond funds. Presently, we prefer the short to medium term end of the yield curve.
