A New and Bold RBI under New Governor !!!

Generally, central bank policy meeting are like religious days for market participants where they all carve out time to listen what financial market god (read governor) has to say. But some meetings turn out to be special, where god gives more than what everyone prays for, and yesterday’s meeting was no less than that.

In central banking, communication is an important tool and different governors across the world have used it to their advantage. But Mr. Malhotra not only used it to his advantage but also for market participants clarifying on growth, liquidity, real rates, FX intervention, change in stance etc.

Lets start with

1) Growth

Mr. Malhotra clearly elucidated that in present growth-inflation dynamics, growth is a bigger concern, and we are ready to work with govt to support growth. Not only this, he went on to add, growth is also important for capital flows.

Please note, a central bank which has clear mandate to target inflation, it cannot be more explicit than this.

2) Liquidity

When asked on system liquidity, governor clearly said that central bank would like to maintain sufficient liquidity for proper policy transmission, and as a reference point, one can consider a ball-park number as 1% of NDTL, which roughly comes to 2.5 lac crs. Again, he cannot be more explicit than this.

He further added, as a central bank, he would not like to anchor liquidity to 1%, and if needed, it can be higher, as well as lower, depending upon market situation. Today, system liquidity is in surplus to the tune of 1.3 lac crs, after being in deficit for more than 3 months and infusing more than 6 lac crs liquidity.

3) Real Rates

According to governor, as per various studies, real rates should be between 1.1% to 1.9%, hence 1.5% can be considered as a good reference point.

With RBI having given inflation forecast of 4% for FY26 and repo rate at 6%, in my view, one can fairly assume that another 50 to 75 bps cut is possible.

4) FX Intervention

As per governor, Indian market is fairly liquid and deep and RBI would like to intervene only during excessive volatility.

Again looking at two way move being allowed in rupee in last 3 months - from 84.50 to 88 to 84.90 to 86.80 and now 86.30, it can be fairly construed that RBI will not mind move in rupee so long as it is not idiosyncratic and move is in line with domestic and global development.

5) Stance

Yesterday RBI changed its stance from neutral to accommodative. But at the same time, governor clarified that accommodative means, absence any shock, only two possible outcome - a rate cut or statu quo.

It was a big clarification for market as it can be sure now that no rate hike possible until there is change in stance. No wonder, bonds saw a decent rally post this to 6.45.

In nutshell, if one reads though all the points, it clearly sends the message that RBI not only want to support growth but also want to keep the communication clear.

So what does this mean for bond market?

A huge positive. I will not be surprised if bond yields soften to as low as 6% or even lower, in next 3-6 months.

Nothing can be more supportive for any market than a dovish central bank with clear communication. Had their been no noise on tariff and jump in US bond yields in morning, Indian bonds could have seen even stronger rally. But more important is direction, and it is clear - heading downward.