RBI MPC: Debt Market Participants Will Eye Inflation Projection The Most In Governor’s Statement

RBI is widely expected to keep the benchmark interest rate or the repo rate unchanged for the fourth consecutive time at 6.50 per cent in the current financial year
RBI Governor Shaktikanta Das
RBI Governor Shaktikanta Das

Market participants in the Indian debt markets will mainly focus on the inflation projection by the Reserve Bank of India in its October Monetary Policy Committee (MPC) meeting outcome, scheduled on October 6.

The central bank is widely expected to keep the benchmark interest rate or the repo rate unchanged for the fourth consecutive time at 6.50 per cent in the current financial year. This expectation is said to have limit the interest of the participants to inflation number projections.

“Market participants will mainly focus on the inflation and GDP projections since the repo rate will not be changed. Apart from the guidance, the only possible trigger is any commentary towards rate-cuts,” said Anirudh Muchhal, Treasury Head at Aditya Birla Capital.

Currently the expectation of rate-cuts by RBI remains beyond the boundary of the current fiscal. Participants are of view that any signal of bringing rate-cuts into the landscape for 2023-24 may move the markets. If not, then the outcome will likely end up as a non-event.

Besides the absence of any hope for a change in the repo-rate, what else reduces their interest to just seek guidance on the macroeconomic indicators is expectation for the central bank to maintain its hawkish stance. The MPC in its August policy review, kept the policy stance unchanged at “withdrawal of accommodation”, a decision that was largely on expected lines then.

All these certainties narrow the focus area for the participants to inflation.

Inflation Projection

RBI had raised its inflation estimate for 2023-24 to 5.4 per cent from 5.1 per cent in August. For quarterly projections, it raised the estimate for September quarter to 6.2 per cent from 5.2 per cent, and to 5.7 per cent from 5.4 per cent for December quarter. The estimate for March quarter was left unchanged at 5.2 per cent.

 “It is expected that the inflation projection for Jul-Sep will be marginally revised upwards. Thus, the overall annual inflation projection accordingly revised,” said Mahesh Agarwal, National Head of Wealth at AUM Capital.

Inflation in the country currently remains above RBI’s tolerance band of 2-6 per cent on back of elevated food prices. The Consumer Price Index (CPI) moderated to 6.83 per cent in August from a 15-year high of 7.44 per cent in July.

Therefore, participants in the bond markets look forward to the commentary of RBI Governor Shaktikanta Das on future inflation outlook during the expected revisions on Friday. However, the impact of the revisions is expected to be minimal.

Yield Trajectory

“We are view that the yield curve, especially the 10 year benchmark yield, will slightly spike up; but at the end of the day it will more or less remain the same,” said Agarwal.

The 10-year benchmark 7.18 per cent, 2033 government bond settled at 7.21 per cent yield, or Rs 99.75 on Thursday. The yields on the sovereign papers were currently on the rise this week tracking a surge in US Treasury yields.

Meanwhile, both three-year and five-year paper in the corporate bond market are trading at levels around 7.70 per cent, with 10-year around 7.62 per cent, debt dealers said.

Also Read | Indian Bonds Loosening Ties With US Peers, Focus More On Domestic Factors

Despite the pressure on government securities from the west, market participants in both the debt markets back home are said to be exercising caution ahead of the MPC outcome.

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