The first monetary policy statement of FY22, scheduled to be made on 7 April 2021, is awaited more for the signals and body language, rather than any monetary policy action.
It is almost a consensus that RBI, like any other major central
banker, may not be in a position to cut rates from the present levels. On the
other hand, RBI governor has made it clear that “...there is no way the economy
can withstand higher interest rates in its current state. It is recovering but
certainly not out of the woods yet”. The governor has gone way out of his way
to assure the bond market and committed “orderly evolution of yield curve” in
public interest.
The bond market has calmed down a bit after aggressive
assertions made by RBI governor, but the traders have not retraced their steps.
The benchmark 10yr yields are now stable close to 6.2%, much higher than the
5.8% to 5.9% sought by RBI.
Next couple of policy statements would therefore be watched to
assess (i) how deep is the RBI’s commitment to keep the yield curve orderly and
liquidity ample; and (ii) when RBI would be ready to hike rates.
The equity markets usually do not have a strong correlation with
the bond market. However, a negative correlation emerges in months preceding
the turning of rate cycle. The current tentativeness and loss of momentum in
equity market is indicating that equity traders are also anticipating a turn in
rate cycle sometime in 2021. A rate hike or a clear indication about the policy
path by RBI could therefore be a positive support for the equity market.
Internationally also financial markets are focused on tapering
of bond buying programs of major central bankers and eventual hike in policy
rates. As per current estimates, FED tapering may begin sometime in 2022 and
rate may not be hiked at least until mid-2023. Notwithstanding the
expectations, the markets are definitely indecisive.
In my view, we shall have an extended period of indecision and
sideways movement in equity markets before the monetary policy makes its next
move. Till then happy trading.
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