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Nirmal Bang Report
Key Points
The Monetary Policy Committee unanimously decided to keep policy rates on hold as was widely expected. The stance was also maintained as 'withdrawal of accommodation'.
The Reserve Bank of India's Governor proposed Open Market Operation sale of G-Secs, which came as a surprise. OMO sales, if any, will be likely announced only post the festive season. In our view, the aim is neutral liquidity not overly tight liquidity and hence bond yields should remain range-bound.
Sustained deficit liquidity could have implications for equity valuations, particularly small-caps and mid-caps (as in 2018). Separately, the RBI warned banks and non-banking financial companies to strengthen surveillance in certain segments of personal loans (read unsecured loans). This could be a precedent to regulatory action if high growth sustains.
The Governor highlighted that inflation target is 4% and not 2-6%, which implies that rate cuts could be delayed. However, we maintain our base case of a rate cut in Q4 FY24 if the current inflation trajectory sustains and the Fed indicates an end to its rate hike cycle. Nevertheless, the rate cut cycle could be shallow.
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