Though the status quo was in line with market expectations, the MPC opted to raise the inflation target for the financial year, which may add to investors’ worries. In this context, experts advise investing in debt funds investing in bonds, maturing in the short term.

Inflation remains a key concern

Inflation decreased to 4.3% in May 2023, but July and August inflation rates are anticipated to be higher. Food prices continue to be a crucial variable that can increase inflation. El Nino’s potential impact on the distribution of precipitation, and consequently on agricultural output, can further drive up prices. Food and crude oil prices have increased globally. The price per barrel of Brent crude oil increased to $87 on August 10, 2023, from $72 on May 31, 2023. These indicators suggest a possible rise in inflation rates.

Accordingly, the RBI has revised its inflation forecast for FY 2023-2024 from 5.1 percent in the MPC’s June review to 5.4%. “We must be prepared to go further, maintaining Arjuna’s eye on the inflation front and, if necessary, deploying policy instruments. In his address announcing the outcome of the MPC review, the Governor reiterated what he said in his policy statement from June: “Bringing headline inflation within the tolerance band is not sufficient; we must remain steadfastly focused on aligning inflation to the target of 4%.”

The RBI has also directed scheduled banks to maintain an incremental cash reserve ratio (I-CRR) of 10 percent on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023 as a temporary measure to deal with excess liquidity in the banking system. This will be implemented commencing two weeks from August 12, 2023. This will be reviewed on or before September 8, 2023. In addition, the governor affirmed that the existing cash reserve ratio (CRR) will remain at 4.5 percent and there will be sufficient liquidity in the system to satisfy the credit needs of the economy.

How does that impact debt fund investors?

The Reserve Bank of India (RBI) is in no rush to lower interest rates due to its determination to keep inflation under control. Bond yields are predicted to stay elevated for a longer time frame. According to Deepak Agrawal, chief investment officer of fixed income at Kotak Mahindra Asset Management Company, “The RBI prefers to be in a ‘wait-and-watch’ mode to check if the recent food price inflation is getting generalised and prefers to keep rates on hold and keep the monetary policy unchanged.” For the rest of CY2023, the rate is expected to remain unchanged.

Short-term bond rates are expected to decrease if the RBI reverses the I-CRR by September with the intention of infusing liquidity in the September review or earlier.

Short-term bond yields in a sweet spot

After the MPC announcement, the benchmark 10-year bond yield did not change from its previous level of 7.17. If inflation rises, as Das said the RBI would, this might increase somewhat.

This is why, in comparison to long-term bond funds, short-term bond funds are less affected. Long-term bond holders take on the risk of fluctuating interest rates. Short-term bonds, such as those with maturities of one or two years, offer yields of roughly 7 percent, making them appear desirable in this context.

“Mint Road seems staunchly focused on keeping consumer inflation within the 4 percent target, while standing pat on rates and monetary policy stance,” says Dharmakirti Joshi, Chief Economist, CRISIL. Short-term interest rates may become more rigid if an incremental cash reserve ratio is implemented.

It might not be the best moment to investigate long-term debt options. Instead, this may be a good time to investigate debt plans that concentrate on the yield curve’s short end.

How should you proceed?

The Association of Mutual Funds in India (AMFI) reported net inflows of Rs 51,938 crore and Rs 8,608 crore into liquid and money market funds, respectively, in March.

June (the end of the quarter) had a net outflow of Rs 14,135 crore for debt-oriented schemes, but July saw a strong net inflow of Rs 61,400 crore. This demonstrates, without a doubt, that the short end of the yield curve is where investors feel most at ease. If you plan to keep your money in the market for only two or three years, short-duration debt funds may be an excellent choice. Investments in liquid, low-duration, and money-market funds can be considered by people with a horizon of less than a year. The current high returns can be taken advantage of with the use of such strategies. According to Value Research, short-term funds earned 6.46 percent and money market funds earned 6.62 percent in the year ending August 9, 2023.

A person’s investing horizon should ideally coincide with the scheme’s maturity period. The portfolio’s creditworthiness should also be evaluated.

Since macros have gone negative since the last statement in June, Trust Mutual Fund CEO Sandeep Bagla has described the monetary policy as a cautious wait-and-see one. The headline CPI reading for July is forecast to approach 6.50 percent. With a 12-month investing horizon, he suggested that the coming months would be an excellent time to increase the portfolio’s duration.

Now could be a good moment to lock in interest rates, since they appear to be nearing a peak. But don’t ignore credit risk in your pursuit of high yields.

Also Read : RBI policy less hawkish, interest rates to remain high for next few months: Unmesh Kulkarni of Julius Baer India

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It will increase the global reach and adoption of RuPay cards.

The RBI Governor stated that RuPay Debit and Credit Cards issued by Indian banks are acquiring popularity abroad.

“It has been decided to allow banks to issue RuPay Prepaid Forex cards. This will increase the payment methods available to Indians traveling abroad. In addition, RuPay cards will be issued in foreign jurisdictions, according to Das.

The RBI’s monetary policy committee voted unanimously to maintain the repo rate at 6.5 percent. Repo rate is the interest rate at which the Reserve Bank of India lends to other institutions.

Consistently falling inflation (currently at its lowest level in 18 months) and the possibility of further decline may have prompted the central bank to once more reduce the key interest rate. The vast majority of analysts anticipated that the RBI would leave the repo rate unchanged.

Inflation has been a concern for many nations, including developed economies, but India has been able to effectively manage its inflation trajectory. The RBI suspended the repo rate at its April meeting, the first of the fiscal year 2023-24.

In an effort to combat inflation, the RBI has cumulatively increased the repo rate by 250 basis points to 6.5% since May 2022, excluding the month of April. Raising interest rates is a monetary policy instrument that typically aids in stifling economic demand, thereby reducing inflation.

Also read this:RBI lowered India’s 2023-24 inflation forecast to 5.1 pc

Regarding the GDP outlook, the RBI anticipates India’s 2023-24 GDP growth to be 6.5%, with Q1 growth of 8%, Q2 growth of 6.5%, Q3 growth of 6%, and Q4 growth of 5.75%. Today, while reading the monetary policy statement, the governor of the RBI, Shaktikanta Das, stated that the central bank considers the risks to these GDP figures to be evenly balanced.

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On a quarterly basis, retail inflation (or the Consumer Price Index) is expected to be 4.6% in the first quarter, 5.2% in the second quarter, 5.4% in the third quarter, and 5.2% in the fourth quarter, RBI Governor Shaktikanta Das said Thursday while reading the monetary policy statement following a three-day deliberation.

During March-April 2023, India’s headline inflation decreased to 4.7% in April, the lowest level since November 2021.

“Tightening of monetary policy and supply-side policies contributed to this process. Das noted that food, fuel, and “core” (CPI excluding food and fuel) inflation all decreased.

“A durable deflation in the core component is essential for sustained alignment of headline inflation with the target,” he said.

Das added that as a result of the recent rabi harvest being “largely immune” to adverse weather, the near-term inflation outlook is more optimistic than it was at the April policy meeting.

Allow me to reiterate that headline inflation is still above the target and that being within the tolerance band is insufficient. Our objective continuing forward is to reach the target of 4%,” he added.

The RBI’s monetary policy committee voted unanimously to maintain the repo rate at 6.5 percent. Repo rate is the interest rate at which the Reserve Bank of India lends to other institutions.

With the key interest rate remaining unchanged, loan and deposit rates are anticipated to remain unchanged as well.

Consistently falling inflation (currently at its lowest level in 18 months) and the possibility of further decline may have prompted the central bank to once more reduce the key interest rate. The vast majority of analysts anticipated that the RBI would leave the repo rate unchanged.

Inflation has been a concern for many nations, including developed economies, but India has been able to effectively manage its inflation trajectory.

The RBI suspended the repo rate at its April meeting, the first of the fiscal year 2023-24.

In an effort to combat inflation, the RBI has cumulatively increased the repo rate by 250 basis points to 6.5% since May 2022, excluding the month of April. Raising interest rates is a monetary policy instrument that typically aids in stifling economic demand, thereby reducing inflation.

India’s retail inflation was above the RBI’s 6 percent target for three consecutive quarters, and only in November 2022 did it return to the RBI’s comfort zone. In accordance with the flexible inflation targeting framework, the RBI is deemed to have failed to control price increases if CPI-based inflation falls outside the range of 2 to 6 percent for three consecutive quarters.

Regarding the GDP outlook, the RBI anticipates India’s 2023-24 GDP growth to be 6.5%, with Q1 growth of 8%, Q2 growth of 6.5%, Q3 growth of 6%, and Q4 growth of 5.75%. Today, while reading the monetary policy statement, the governor of the RBI, Shaktikanta Das, stated that the central bank considers the risks to these GDP figures to be evenly balanced.

According to recent estimates released by the National Statistical Office (NSO), real GDP growth for 2022-23 was 7.2%, which was higher than the expected 7%. The government anticipates an upward revision to the GDP figures for 2022-23 moving forward.

Also read this:Repo rate, inflation and GDP: What did RBI’s Monetary Policy Committee say today

In spite of robust global headwinds and stricter domestic monetary policy tightening, India is expected to be one of the fastest-growing economies in 2023-24, supported by robust growth in private consumption and sustained pick-up in private investment.

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In December 2022, following the year’s final MPC meeting, the RBI increased the repo rate by 0.35 percentage points to its current level of 6.25 percent. This fifth consecutive increase in interest rates brought the repo rate to its highest level since March 2019. In contrast, the reverse repo rate remained unchanged at 3.5%.

The RBI governor begins his speech by announcing the first Monetary Policy statement of 2023.

Repo rate increased in prior meeting.

At its previous meeting in December 2022, the MPC increased the repo rate by 0.35 percentage points but left the reverse repo rate unchanged. Read

The Real GDP growth for 2023-24 is projected at 6.4% with Q1 at 7.8%, Q2 at 6.2%, Q3 at 6% & Q4 at 5.8% :RBI Governor Shaktikanta Das pic.twitter.com/xDu5YgiDMv

— ANI (@ANI) February 8, 2023

What are monetary policy, the reverse repo rate, and the repo rate?

Here is all the information you need concerning monetary policy, repo rate, and reverse repo rate.

This is the interest rate charged by the RBI when commercial banks sell their securities to the central bank in order to borrow money. Essentially, it is the interest charged by the Reserve Bank of India (RBI) when banks borrow from it, similar to how commercial banks charge interest on auto loans and home loans. Current repo rate is 6.25 percent.

The Reserve Bank of India’s Monetary Policy Committee meeting, which began on Monday, will announce its decision on Wednesday, amid predictions that the repo rate will increase by 25 basis points (bps).

What is financial policy?

The monetary policy of the Reserve Bank of India is a collection of financial instruments and measures designed to safeguard and promote economic growth. The RBI conducts monetary policy with the “primary goal of maintaining price stability while keeping in mind the objective of growth,” as stated on its website.

Monetary policy reviews are one of the central bank’s most effective tools for achieving financial stability and economic growth. Monetary policies govern the overall money supply available to commercial banks and, indirectly, to individuals and businesses.

Also read this:RBI gives people more time to sign new contracts for existing lockers

What exactly is the repo rate?

This is the interest rate charged by the RBI when commercial banks sell their securities to the central bank in order to borrow money. Essentially, it is the interest charged by the Reserve Bank of India (RBI) when banks borrow from it, similar to how commercial banks charge interest on auto loans and home loans. Current repo rate is 6.25 percent.

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