● The MPC unanimously decided to keep the repo rate unchanged at 4%.
● RBI continues to maintain its accommodative stance as long as necessary to revive growth.
● Reverse repo rate remains unchanged at 3.35%.
● Marginal standing facility and bank rate remain unchanged at 4.2%.
On India’s GDP Growth
India’s GDP is expected to contract 7.5% in FY21 due to economic disruptions caused by the COVID-19 outbreak. However, the projected number has seen improvement against earlier projected contraction of 9.5% due to the economic recovery. Further, RBI foresees positive growth in H2. Q3 FY21 growth is seen at 0.1% and Q4 FY22 at 0.7%.
RBI projected CPI inflation at 6.8% in Q3 FY21 and 5.8% for Q4 FY21. For H1 FY22, 5.2–4.6% inflation is expected with risks broadly balanced.
Retail inflation remains sticky. In October, the retail inflation stood at 7.6%, which is the highest in the last six years. This is elevated due to higher food inflation.
On Financial Market
There has been significant moderation in the structure of interest rates across the spectrum, narrowing of risk spreads, and a record issuance of corporate bonds. The spread of AAA-rated three-year corporate bond yields over G-Sec yields of corresponding maturity fell from 60bps on October 8 to 17bps on November 27. Corporate bond issuances stood at Rs 4.4 lakh crore during April-October 2020 as against Rs 3.5 lakh crore during the same period last year.
The Regional Rural Banks (RRBs) are currently not permitted to access the liquidity windows of the Reserve Bank as well as the call/notice money market. These banks will be allowed to access the liquidity adjustment facility (LAF) and marginal standing facility (MSF) of the RBI; and also the call/notice money market.
On Bond Market:
Corporate bond spreads have narrowed to pre-COVID levels. Bond market conditions have evolved in an orderly manner. Further, the enterprises with robust strong ratings has seen strengthening in bond issuances.
Debt management operations, monetary operations, and market operations are in sync with each other. RBI stands ready to take necessary measures to ensure easy market conditions.
Our View on Market:
We maintain a positive view of the overall market as indices trend into new highs with low distribution day count. Further, leadership remains widespread across multiple sectors. We continue to recommend a selective approach to increasing risk. Focus on high-quality ideas emerging from sound bases with an RS line at or near a new high. After a strong rally, pullback/consolidation (if any) is a constructive sign if Nifty holds its short-term moving averages. On the flip side, tracking distribution days is crucial. Accumulation of distribution days can be a sign of market top and halt the uptrend.
What do you think? Please email us any questions or comments.Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.For more information, see our Legal disclosures here.