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We expect the RBI to maintain a status quo on rates. Most likely, we have already seen the last rate hike in February and the RBI will remain on an extended pause on policy rates in foreseeable future.
The key thing to watch in the upcoming monetary policy would be the RBI’s policy stance. Till the last year, the monetary policy was ultra-accommodative with the policy repo rate significantly below their normal levels and banking system flooded with liquidity. Now, the repo rate at 6.5% is very close to its long-term average. Liquidity is still in surplus, but it has come down to a level which can be taken as close to normal and as non-inflationary. So, there is a strong case for the RBI to retire the phrase “withdrawal of accommodation”.
I think, RBI’s decision on stance will be more dependent on manging market’s perception than inflation and liquidity outlook. The fear is that the change in stance could be taken as a declaration of victory over inflation and could hamper the transmission of earlier tightening which is required to keep inflation under check. At this juncture, the RBI cannot be seen as getting complacent on inflation.
Currently, the bond market is positioned with some expectation of stance change from “withdrawal of accommodation” to “neutral”. In our opinion, this policy decision should not have any material impact on the bond market though there could be minor fluctuation in yields depending on policy stance and language.
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