RBI raises repo rate by 40 bps in surprise move
First hike in 45 months; CRR increased by 50 bps; bond yields shoot up
In a surprise move, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday unanimously decided to increase the repo rate by 40 basis points (bps) in an offcycle meeting, citing inflation concern. This was followed by a 50 bps hike in the cash reserve ratio to 4.5 per cent, which will drain out ~87,000 crore liquidity from the banking system.
This was the first repo rate hike in 45 months -- since August 2018.
The increase in the repo rate will lead to lending rates getting pushed up because 40 per cent of the loans of commercial banks are linked to it.
The 10-year government bond shot up 26 bps, with the street expecting another rate hike in the June policy.
As a result, the standing deposit facility (SDF) rate is now at 4.15 per cent and the marginal standing facility (MSF) rate at 4.65 per cent. The SDF and MSF constitute the lower and the upper end of the interest rate corridor.
While hiking the repo rate, the MPC decided to stay “accommodative” but dropped the word “stance” from its resolution -- for the second meeting in a row.
RBI Governor Shaktikanta Das cited upside risks to the central bank’s inflation projection.
“The strengthening of inflationary impulses in sync with the persistence of adverse global price shocks poses upward risks to the inflation trajectory presented in the April MPC resolution,” Das said.
The March inflation number was close to 7 per cent, much above the central bank’s upper tolerance threshold of 6 per cent. The April inflation numbers too are expected to be high.
“High frequency price indicators for April indicate the persistence of food price pressures. Simultaneously, the direct impact of the increases in domestic pump prices of petroleum products – beginning the second fortnight of March – is feeding into core inflation prints and is expected to have intensified in April,” Das said.
THE STRENGTHENING OF INFLATIONARY IMPULSES IN SYNC WITH THE PERSISTENCE OF ADVERSE GLOBAL PRICE SHOCKS POSES UPWARD RISKS TO THE INFLATION TRAJECTORY PRESENTED IN THE APRIL
MPC RESOLUTION
SHAKTIKANTA DAS,
RBI governor
The Reserve Bank of India (RBI) on Wednesday made a surprise announcement by increasing the repo rate by 40 basis points (bps) to 4.4 per cent with immediate effect. Debt fund managers in the country say investors should expect further rate hikes and look to invest in money-market instruments, floating-rate funds, and target-maturity funds.
“Debt mutual funds (MFS) will see a loss on Wednesday across the maturity spectrum. However, one can start investing in funds up to a two-year maturity, especially roll-down funds like TRUSTMF Banking & PSU Debt Fund, which will have a yield of 6.25 per cent now. September is when I expect most of the turmoil in bond markets to be largely over and investments in long bond funds could be made then,” says Sandeep Bagla, chief executive officer, TRUST MF.
On Wednesday, 10-year government bond yields ended the day at 7.4 per cent, against Monday’s closing of 7.1 per cent.
In the past year, some debt categories like money-market funds, ultra-short-term duration and dynamic bonds have given returns in the range of 3 per cent.
Market participants expect the pace of policy normalisation to likely get faster after the outof-turn hike in repo rate.
R Sivakumar, head — fixed income at Axis MF, says, “It would seem the RBI would want to normalise liquidity within the next 12 months, and possibly raise the repo rate above the expected inflation rate. With inflation projected to average around 5.1 per cent in Januarymarch, it would seem the RBI is signalling repo rates to go back to pre-pandemic levels of 5.15 per cent (at the very least). That suggests further rate increases of 75 bps or more in the near term.”
Typically, the prices of fixedincome securities are dictated by prevailing interest rates. Interest rates and prices are inversely proportional. When interest rates decline, the prices of fixed income securities increase. Similarly, when interest rates are hiked, the prices of fixed income securities come down.
Consequently, the longer duration debt instruments are more prone to intense volatility during a period of rising interest rates.
Dhawal Dalal, chief investment officer-fixed income at Edelweiss MF, says, “Investors with long-term fixed income allocation should probably wait until the June monetary policy and allocate a portion of their surplus (25 per cent) after the outcome and keep allocating 25 per cent each after subsequent policy outcomes in target maturity bond exchangetraded funds/bond index funds maturing in five- to 10-year residual maturities, depending on their comfort.”