By Amit Somani, Deputy Head – Fixed Income, Tata Asset Management.

RBI MPC unanimously decided to kick-start rate hike cycle by increasing repo rate by 25bps to 5.50%, in line with market expectations. The policy stance has been changed from Neutral to Calibrated Tightening signalling more hikes. After overwhelming response to FCNR flows and consequent increase in banking system liquidity, no announcement of regulatory measures to suck-out liquidity is a positive. Tighter global financial condition along with higher bond market yields globally also played on tightening cycle. 

CPI Inflation has been revised higher from 5.0% to 5.2% for FY27 on account of monsoon deficit, persistent higher crude oil and commodity prices. Importantly, inflation over next 3 quarter is likely to remain substantially elevated towards higher range of Inflation band around 5.8%. 

GDP outlook has been revised higher from 6.7% to 7.1% for FY27 on account of Q1 GDP growth surprise as well as sustained Government’s thrust on infrastructure and higher credit growth well into Q2. 

Policy tone sounded more cautionary on Inflation generalization than Growth outlook, giving it a hawkish tilt.     

RBI seems to keep ample banking system liquidity to support economic activity as no regulatory announcement came in to suck-out liquidity. We expect RBI will likely manage surplus liquidity conditions through existing toolkit. This should keep overnight rate around the policy corridor. 

Given that policy outcome was largely in line with market expectations, we believe short term rates are likely to remain stable with adequate liquidity prevailing in the banking system. We expect 3-6 month CD rates to continue to trade around 6.60-7.00% levels while 1-year CDs to trade around 7.50%-7.75%, expecting continuing rate hikes over next couple of policies. Long-term rate are likely to settle higher with 10-yr G-sec expected to trade in 7.20%-7.40% range. 

Beyond domestic monetary policy, global bond yields and geopolitical risk will continue to drive short term as well as long term yields.