Expect short term yields to inch up over the next 1-2 quarters – MPC 8th October – Acuité Ratings

Mr. Suman Chowdhury, Chief Analysis Officer, Acuity Ratings & Research comments on the MPC announcement on October 8, 2021

“In line with expectations, the MPC has continued to reaffirm its commitment to an accommodative policy until we witness the emergence of a broad and sustainable national economic recovery. no change in benchmark rates, the central bank has indicated its willingness to make a “gradual” adjustment to excess liquidity in the monetary system, which currently stands at over 9 Lakh Cr. The VRRR auction existing 14 days will be strengthened, with the auction amount expected to increase by Rs 1-2 Lakh Cr over the next 2 months, reaching up to Rs 6 Lakh Cr by December 21. In addition, RBI may also consider the introduction of a 28-day VRRR, if necessary to further calibrate liquidity levels. market securities govt has been halted for now to ensure that there is no further injection of liquidity. The plan is to reduce the excess liquidity in the system from the current high levels to around Rs 2-3 Lakh Cr by the end of the quarter curr ent. Although the RBI has clarified that these measures cannot be interpreted as measures to tighten liquidity, we believe they are first steps towards normalizing the very accommodative policy. We expect short term yields to rise over the next 1-2 quarters based on these forecasts.

What is also important is that the RBI reduced its headline inflation forecast to 5.3% from 5.7% in FY22 based on the current moderation in the liquidity path. While food inflation is expected to remain low, we believe that inflation needs to be watched very closely over the coming months given persistent pressures on commodity prices, industrial commodity shortages and the imminent recovery in consumer demand. “


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