RBI may hit the pause button in June: Mahendra Jajoo

In line with market expectations, at the monetary policy review, RBI cut repo rate by 25 basis points to 7.25%. The guidance continued to be cautious with key risks being high current account deficit, double digit high consumer price inflation and volatile nature of capital flows. RBI also highlighted risk of a rebound in commodity prices following the record quantitative easing initiated by Bank of Japan recently. RBI once again reiterated that there was very little room for further policy rate cuts.  In another significant move, HTM (held to maturity) limit (part of their holding of government bonds which banks can hold at cost prices and need not recognise losses if any based on market prices) was reduced by 2% to 23% to align with SLR limit of 23%.

Bond prices continued to rally ahead of the policy, earlier in the week with benchmark 10 year yields hitting a low of 7.70%. However, the macro economic  survey, released on Thursday evening, ahead of the monetary policy announcement, sounded very hawkish with suggestions of a possibility of a reversal in current easing stance in case the volatile capital flows slow down.
As markets very already richly valued in anticipation of the rate cut, bond prices opened lower on Friday, the policy day and continued to trade lower, following announcement of the rate cut, as the guidance was relatively cautious. Benchmark 10 year yields traded all the way up to 7.81% before bargain buying set in. Following positive comments from finance ministry officials and reassuring comments in the follow-up press conference by RBI, markets regained some momentum, closing the day marginally lower at 7.74%. Money market and corporate bond markets also reflected similar patterns closing marginally weaker for the day.

Most analysts now expect further rate cuts ranging 50-75 bps even though RBI remains cautious. We expect RBI to pause in June policy. As RBI has laid great emphasis on incoming data, markets will remain very sensitive to the same and therefore volatile. Monsoon trends will be critical for food price inflation. Bond markets still have enough space for further gains as the incoming data is expected to be supportive. However, as market is currently very richly valued, there could be some volatility in near term.

The author is head of fixed income at Pramerica Asset Managers