The Monetary Policy was announced by the Reserve Bank of India (‘RBI’) in which it has kept the repo rate unchanged at 4%. The Monetary Policy had the objective to retain its ‘accommodative’ policy stance- Governor Shaktikanta Das said.
Rajni Thakur Economist, RBL Bank on Monetary Policy contended “MPC decisions taken strongly facilitate the RBI’s communication on continued monetary policy support till the growth revival is broad based.”
The key takeaways concerned RBIs move towards looking through inflationary pressures in current uncertain times and move in the direction of achieving growth and second, is the RBI’s commitment to ensure smooth execution of Government’s huge borrowing program through a G-SAP (Secondary Acquisition Program) to purchase the government bonds in the Financial Year of 22’. This particular move of RBI would certainly help improve the bond market sentiments.
Unchanged Repo Rate
The unchanged repo rate as stated by RBI is certainly a welcome move owing to the fact that the second wave of COVID-19 is certainly hampering the economic growth which was a bit in a recovering stage. It was stated by Shiv Parekh, the founder of hBits a fractional real estate platform to pay a special attention to the real estate sector because it contributes significantly to the economic growth of the nation.
The move taken by RBI regarding G-SAP has been taken at a very positive note by the bond traders. The G-SAP will fundamentally provide a calendar for OMOs through the medium of secondary markets which the markets have been demanding since a time ago. This move should be positive for the bond market in near terms and push the yield curve to the flatter. (Bond Yield is the return an investor realises on the Bond)
Flattening the Yield curve
It is imperative to note that in the period of FY 21, the Central Bank bought Rs. 3.13 trillion worth of government bonds through its Open Market Operation channels. However, if we check the Central government’s borrowings it was a humungous Rs. 13 trillion, the RBI ended up absorbing just a quarter of the bond supply for the year. Speaking tersely, the focus now is to bend the yield curve and the central bank is getting deeper into yield management through a pre-commitment of bond purchases. This will remove the clouds of uncertainty for market participants taking into account the commitment for G-SAP and help us to curb the elevated premiums and enable the efficient portfolio decisions.
The annual policy maintains a steady course, projects improvement in growth- inflation projection and balances the bond markets effectively.
RBI Monetary Policy: Steady and Bold by Shubhada Rao, Founder QuantEco, Published in Business Standards on 7th April, 2021- https://www.business-standard.com/article/economy-policy/rbi-monetary-policy-steady-and-bold-121040700591_1.html
Bend it like RBI Das: Yield curve Management takes centre stage, Published in Mint dated 7th April, 2021-https://www.livemint.com/market/mark-to-market/bend-it-like-rbi-das-yield-curve-management-takes-centre-stage-11617774947159.html