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Rising Inflation, what to expect from RBI

June 20.2022
Yogesh Jha

In the wake of Pandemic, the Reserve Bank of India based on the MPC decisions has slashed the policy repo rate under the liquidity adjustment facility (LAF) by 75 basis points to 4.40 per cent from 5.15 per cent on March 27, 2020.  This event followed by another rate cut action on May 22,2020 by 40 Basis bringing Repo rate to 4% which helped market on crucial liquidity front during extreme challenging time during times of lockdown. These cuts helped bond market to bring down the yield to historical low and resultantly the borrowing cost also reduced substantially. 

But as world market is coming out of pandemic and the economy is gaining momentum, this excess liquidity caused a worldwide inflation. And as growth has oriented back to pre-pandemic levels Central banks around the world have started to acknowledge the serious challenges aroused due to substantially rising inflation. To contain the inflation, the regulators across the globe have taken different measures by hiking their respective policy rate. On 5th May’2022, the Federal Reserve has increased their policy rate by 50 bps which is highest in the last 22 years. 

In India, RBI has also started to acknowledge in the last MPC meetings but had reluctant to take any policy action at that point of time. But within a very short of time, RBI has to call an off-cycle meet to take down this rising decade high inflation on 4TH of May 2022. The off-cycle meet of MPC announced hike in benchmark Repo rate by 40 bps and another 50-bps hike in CRR kept the broader markets on the tenterhooks, as the realization of siding with changing realms of inflation control gained currency, already palpable for some time as economies from developed as well as emerging worlds have struggled to rein in the galloping price rises that hurt the masses, and probably classes alike. With today’s increase, the standing deposit facility (SDF) rate now stands adjusted to 4.15% and the marginal standing facility (MSF) rate and the Bank Rate to 4.65%, maintaining the LAF corridor.

The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth, reflecting the pragmatic approach even while traversing the chequered path assiduously. That asserts the flexibility in RBI’s approach to choose the most suitable tool in addressing the most persisting issue, through a combination of tools, conventional to unconventional, or both! With the current hike of 40 bps in repo rate to 4.40% it seems the rate cycle has made a U-turn (from the steep cuts seen in early 2020) and RBI would continue to increase the rates going forward and may reach the pre-pandemic level of 5.15% by end March 2023 or early only time will tell. Further, the CRR hike by 50 bps will exert further upward pressure on interest rates while sucking system liquidity. This hike of CRR, sucks 87000 Cr liquidity form the system immediately and in a couple of months this reduction of liquidity will be increased to 200,000 Cr as per the rough estimate. 

This is a very interesting and challenging time ahead. There are many things happening which has not seen by the market since the last many years. Equity market, Forex market, Bond market everyone has its own story, which is full of surprises. Equity is behaving like a swing, INR has touched a new level, it will be curious to watch how the bond market will behave in the era of multiple uncertainties.




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About IIB

We provide financial planning, advice and resources that investors need. As the financial industry evolves and customer needs become more complex, we have and continue to reinvent, innovate and transform ourselves to be ready for the financial landscape of tomorrow.

Our team is led by Bhavanand Kumar Mishra who has outstanding expertise in the Bond Market, Forex. He is M.B.A, certified associate of Indian Institute of Bankers, certified treasury professional holder from IIBF, Mumbai. He has worked as Chief Dealer in almost all asset classes especially in the Fixed Income in the treasury, with twenty plus years of expertise including overseas experience at London & Birmingham in U.K. in the Punjab National Bank, which is the second largest PSU Bank in India. Mr. Mishra is supported by a team of young professionals.

Why Do You Need To Invest in Bonds?

The size of Indian Bond market is increasing substantially year on year basis and so the opportunity also multiplies. Indian Bond market consists of Central Government securities (G-Secs), State Development Loans (SDLs), Treasury Bills, these securities are also called as Sovereign assets classes. Particularly State Development Loans is a higher yield asset class and suitable for the retail investors. State Development Loans (SDLs) maintains 25 to 50 bps spread from the G-Secs in the respective maturities however, these spread is not sacrosanct and may vary depends on the multiple variables.

As far as Corporate Bonds are concerned, Public Sector Undertakings like PFC, REC, NABARD, NHAI, etc, Private Companies, NBFC are issuing multiple bonds round the year having different maturities. These corporate bonds carry substantial spread from the G-Sec.

Generally, before investing in Bank/Corporate Fixed Deposit, depositors compares the rate of different bank's offered rate of interest and then decides where to invest in. Generally, investors don't give importance to the fact that their deposits per bank is secured only up to INR 5 Lakh. Further, if the individual left with additional surplus money, he/she chooses to invest in the Debt MFs. In the debt MFs, there are multiple entry or/and exit load and other charges which makes their return less profitable than their direct investment in the bond. At the end of day, Fund Managers of the Debt MFs invest in the bonds only which are available in the market.

Summary - The diversification of the investment portfolio is the key to manage hard earned savings. While we don't negate the importance of Bank's Fixed Deposit, but at the same time we also don't appreciate investing all the money either in the Bank/Corporate FDs or in the MFs. In the modern era, when all the information are widely and easily available, we must change the investing habits a little bit to earn more without putting any extra effort. Interestingly, investing in the bond is quite easier than our believe as everything can be done sitting at the home.

What are the Different Types of Investments?

Bonds are issued by organizations generally for a period of more than one year to raise money by borrowing. Following are the types of bonds:

  • Fixed Rate Bonds
    In Fixed Rate Bonds, the interest remains fixed through out the tenure of the bond. Owing to a constant interest rate, fixed rate bonds are resistant to changes and fluctuations in the market.
  • Floating Rate Bonds
    Floating rate bonds have a fluctuating interest rate (coupons) as per the current market reference rate.
  • Zero Interest Rate Bonds
    Zero Interest Rate Bonds do not pay any regular interest to the investors. In such types of bonds, issuers only pay the principal amount to the bond holders.
  • Inflation Linked Bonds
    Bonds linked to inflation are called inflation linked bonds. The interest rate of Inflation linked bonds is generally lower than fixed rate bonds.
  • Perpetual Bonds
    Bonds with no maturity dates are called perpetual bonds. Holders of perpetual bonds enjoy interest throughout.
  • Subordinated Bonds
    Bonds which are given less priority as compared to other bonds of the company in cases of a close down are called subordinated bonds. In cases of liquidation, subordinated bonds are given less importance as compared to senior bonds which are paid first.
  • Bearer Bonds
    Bearer Bonds do not carry the name of the bond holder and anyone who possesses the bond certificate can claim the amount. If the bond certificate gets stolen or misplaced by the bond holder, anyone else with the paper can claim the bond amount.
  • War Bonds
    War Bonds are issued by any government to raise funds in cases of war.
  • Serial Bonds
    Bonds maturing over a period of time in installments are called serial bonds.
  • Climate Bonds
    Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse changes in climatic conditions.

What are Bonds and Debentures?

In general, Bonds and Debentures are interchangeably used in conversation but they have their own definition and characteristics related to them.

What Are The Different Types Of Bonds and Debentures In India?

Here is the list of popular Bonds and Debentures available in India.

  • Central Government Bonds
  • State Government Bonds
  • Municipal And Local Authority Bonds
  • Corporate Bonds
  • Public Sector Bonds
  • Tax-Free Bonds