View on RBI Monetary Policy

Posted On Friday, Sep 30, 2022


The policy was broadly in line with the market expectation. The fact that the RBI kept the policy stance unchanged as ‘withdrawal of accommodation’ indicates the door is open for a further hike in the policy repo rate. The terminal rate expectation in the bond market has moved up to 6.5%.



Aggressive monetary tightening in the advanced economies will continue to weigh on domestic monetary policy. It would be difficult for the RBI to soften its stance in such a hostile global environment.



Declining banking system liquidity over the last few months has put upward pressure on short-term money market rates. The RBI seems comfortable with prevailing liquidity conditions and there was no indication of durable liquidity infusion at this stage. This keeps the OMO purchases of bonds out of the picture for now.



The RBI guided to keep the banking system liquidity near neutral through variable rate repos and reverse repos. This should support the short-term bonds though longer tenor bonds may face some pressure in absence of OMO purchases by the RBI.



We expect the 10-year Gsec to continue to trade in a range of 7.2%-7.6%. Short-term money market rates will move higher along with the policy repo rate.



We should expect interest rates on fixed deposits as well as on home loans to move higher.



For long-term fixed income investors, dynamic bond funds are best suited in this volatile market environment for a 2-3 year investment horizon. Investors with a low-risk appetite and shorter holding periods should stick to liquid funds.




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The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.


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