Gov’t Bond Curve Bear Flattens As RBI Stands Pat & Reaffirms Policy Stance

The liquid benchmarks on the INR government bond curve finished 4-6bp cheaper on Thursday, with the RBI’s affirmation of its existing policy stance (continued focus on the withdrawal of accommodation) promoting a bear flattening impulse. The decision on rates was unanimous, while 1 board member dissented re: the stance.

• The Bank marked its CPI forecast for the current FY 0.1ppt lower, while Das noted that inflation being within the tolerance band was not enough, with the RBI ready to act re: keeping inflation expectations anchored (aiming for inflation that aligns with 4% on a “durable” basis).
• Looking ahead, uncertainties re: the monsoon season are present, while inflation risks were cited as evenly balanced.
• Das sounded quite upbeat on growth, although the current FY growth forecast was unchanged at 6.5%.
• All in all, there is scope for the RBI to move to a neutral policy setting in coming meetings, but a further easing in core inflation will be needed to justify such a shift.
• The Bank will resume its short-term reverse repo operations tomorrow. The take up of these facilities has fallen short of RBI upper limits in recent days, with the Bank looking to combat swelling liquidity.