Another RBI policy is coming up our way and many thoughts on what should happen versus what actually happens are floating around. How is the undertone – bullish, bearish or neutral? Can there be further indications of liquidity normalisation? Can we see revisions (lower) to India’s GDP growth outlook? Will CPI numbers get revised higher? These and many more are the possible queries on the minds of most bond market participants.

The key reason is that we are in the midst of the second wave of the Covid pandemic, which has not fully abated. Daily new cases have moderated in most parts of the country, which is indeed encouraging. Vaccination drive is on across the country with daily vaccination doses at ~2 million per day currently.

From an economy perspective, high frequency indicators are currently presenting a mixed picture. While mobility and sentiment indicators have moderated, activity indicators are showing resilience. WPI inflation touched 10.5% in April, while CPI inflation stayed within RBIs projected range at 4.30%, RBI’s key watch out factor is the CPI, not the WPI, hence tracking CPI on monthly basis is key to policy direction going forward.

RBI has already announced some monetary and regulatory measures earlier in May (inter policy) to ease potential pain points due to Covid-19. It also indicated willingness to provide further relaxations if the situation warranted. We expect continuity of these measures in the forthcoming policy as well. There is no expectation of any rate action, though we do expect the policy undertone to remain dovish. Growth remains a priority for the central banker, as much as it is for the government.

There is no material threat on demand side inflationary pressure due to the current pandemic situation, and the resultant weak labour market and negative output gap. There is also market expectation of GSAP continuity (G-sec secondary market acquisition program); GSAP 1.0 was announced in the previous policy (INR 1 tn). We could see GSAP 2.0 being announced for the July-Sept 21 quarter for a similar quantum.

GSAP indeed has been a strong driver to keep yields rangebound with an easing bias, and to ensure orderly evolution of the yield curve. We may also see additional measures towards SME (small and medium enterprise), MFIs (Micro finance institutions) over and above what RBI had announced on May 5.

On the risk front, RBI may sound cautious on global commodity price rise, especially crude oil. From the previous monetary policy till date, crude oil prices are up ~10%. The rupee in the same period has appreciated, though net impact is still negative.

The bottom line us, RBI may choose to monitor the evolving situation, and prefer to play the wait and watch game than accelerating the pedal for now. Hence, any meaningful changes to the growth or inflation forecast seems unlikely for now. It may be a non-action packed policy for the bond wallahs, unless RBI decides to bring in a few pleasant surprises.

(
Lakshmi Iyer is CIO of Debt & Head of Products, Kotak Mahindra AMC.
Views are her own)

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