RBI maintains status quo: Exploring the rationale behind the decision

Broadly meeting the market expectations, the RBI today kept the key interest rates unchanged at 6.5% in its policy announcement, the second time in the current fiscal. It also kept the GDP growth forecast intact, noting that the Indian economy has stood out strong and resilient amid the global crisis. 

The key highlights of the announcement:

1. The repo rate kept unchanged at 6.5% as per market expectation
2. Continued with “withdrawal of accommodative stance.”
3. GDP growth projection for 2023-24 is unaffected at 6.5%
4. The inflation projection for FY’24 lowered to 5.1% from 5.2%
5. Liquidity in surplus mode could increase due to a 2000 note deposit

Exploring the rationale behind the decision to maintain the status quo on rates:

• The easing of India’s headline consumer price inflation, economic growth and financial and external sector stability has given RBI the confidence that its policies are on the right track and the repo rates can stay unchanged. 
• However, since the inflation is still away from the target of 4%, RBI may continue to keep a close vigil on inflationary trends, particularly as the monsoon outlook and the impact of El Nino remain uncertain.
• Global economic activity may decelerate this year, impacted by elevated inflation, tight financial conditions and geopolitical tensions. While the monetary tightening by advanced countries like the United States seems to be relaxing, uncertainty remains on the future trajectory.
• The central bank also noted that average system liquidity is still in surplus mode and could increase as ₹2,000 bank notes are deposited. 

In-house view: Kotak Mutual Fund

India is placed well amid global turmoil but given that the global central banks continue to raise interest rates and the future path of rates by the Federal Bank is unclear, RBI decided to keep the rates unchanged. Due to a spike in global bond yields overnight, we saw close to a 2-3 basis point increase in yield curve across India. Investors with over one-year investment horizons may continue to look to invest in dynamic funds, Gilt funds, Banking PSU funds, and medium-term funds.

---

Source: https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=55816

Source: Kotak Mahindra Asset Management Company Limited internal research

 Data as on: 8th June, 2023

The document includes statements/opinions which contain words or phrases such as "will", "believe", and "expect", and similar expressions or variations of such expressions, that are forward looking statements. Actual results may differ materially from those suggested by the forward looking statements due to risk or uncertainties associated with the statements mentioned with respect to but not limited to exposure to market risks, general economic and political conditions in India and other countries globally, which may have an impact on investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc.

The information contained in this (document) is extracted from different public sources/KMAMC internal research. All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. This is for the information of the person to whom it is provided without any liability whatsoever on the part of Kotak Mahindra Asset Management Co Ltd or any associated companies or any employee thereof. Investors may consult their financial advisors before making any investment decision. 

These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

 MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY