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RBI Policy & Fixed Income Outlook, Feb 2018

The Monetary Policy committee announced its Sixth Bi-monthly Monetary Policy for the financial year 2017-18.

  • The RBI policy came amidst uncertainty with market participants, given the change in fiscal roadmap, underlying global macro, as well as the recent sharp rise in local & global bond yields.
  • While some were expecting RBI to be very hawkish, few market participants were even assigning probability for rate hike. The policy turned out to be hawkish than previous one. While there was no rate action, RBI stance was also kept neutral.
    • 5 out of 6 members voted for status quo on rates, one voted for 25 bps rate hike.
    • Yields were down by 5-10 bps as hawkishness in tone of RBI was less than what market participants anticipated.
  • The MPC view that “the nascent recovery needs to be nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management” is noteworthy. Thus, we expect RBI to stay on hold in near term.
  • Inflation for Q4FY18 inflation is forecasted at 5.1% against 4.6% in Q3FY18.
  • While increase in yields has priced in at least two rate hikes, RBI didn’t seem to indicate rate hike in near term. Yield movement going forward might be dependent on various local & global factors including oil prices, inflation and global bond yields.