RBI MPC likely to hold repo, policy stance, but markets may rally on rate cut hints

Even as the worst of inflation is behind, and core retail prices are on a downward trend, Yes Bank economists expect the RBI to maintain a hawk-eye on the inflation dynamics, given that food inflation has been recurrent in the recent past due to uncertainties in climate and rising geopolitical tensions. Also, the guidance of the central bank towards achieving the stated target of 4 percent would continue.

According to a Moneycontrol poll, the RBI is likely to leave the key interest rates unchanged. An overwhelming majority of the economists polled also said that the central bank would maintain the policy stance of withdrawal from accommodation in the meeting, thus largely continuing the policy approach taken in recent months. Yes Bank expects the first rate cut to be in August 2024.

Market outlook

As the RBI MPC meeting’s outcome will be announced during the trading hours, the market may see the momentum shifting to key banking stocks amid status quo on the interest rate front, according to Om Mehra, technical analyst at SAMCO Securities. "The market undertone is bullish, and the major trend of the market is on the positive side. Hence any short-term corrections will remain a buying opportunity," he said.

"Markets will keenly watch the RBI governor's intent to cut rates. Investors can expect renewed rally if the central bank steered towards monetary policy easing, otherwise it may remain as it is,” Nishit Master, portfolio manager at Axis Securities PMS, said.

Another key thing to watch out for in this policy would be the MPC’s voting pattern. After the last monetary policy, some of the MPC members openly advocated for a rate cut. "We might see a split voting on rates this time with one or two MPC members voting for a rate cut," said Pankaj Pathak, fund manager for fixed income at Quantum AMC.

The bond market is pricing for a softer tone from the RBI. "However, in case of split voting on rates, the market will increase the rate cut probability and yields might fall. The RBI’s stance on liquidity can also influence the market in a significant way. By all means this is going to be a live policy," Pathak said.

Also Read | Moneycontrol Poll | Bankers, economists expect MPC to leave repo rate unchanged on Thursday

Could RBI precede the US Fed on rate cuts?

The US Federal Reserve in its FOMC meeting on January 31 kept the rates steady, and quashed hopes of a rate cut in March. Fed chair Jerome Powell said in an interview that the central bank will proceed carefully with interest rate cuts this year. They are likely to move at a considerably slower pace than the market expects.

At present, a swift change in risk appetite and low volatility in risk assets have given a comfortable breathing space to EMs, including India, on offering higher risk premia, said Emkay Global. As of now, markets are assigning near 60 percent probability of the first Fed cut by May 2024. Domestic policy normalisation is seen by February 2024, with one cut each in June 2024 and October 2024, it said.

According to the brokerage, factors such as US inflation trends taking time to discern; economic resilience; and easier financial conditions feeding back into demand may be slowing any early move towards the central bank easing policy this year.

"This should restrain the RBI from cutting early as well. As of now, we see the Fed not cutting before June 2024, with the RBI following suit with a lag. We maintain that the RBI will not precede the Fed in any policy reversal in CY24," it said.

Also Read | Markets eye monetary policy for rate cut cues even as RBI will likely keep repo rate unchanged

What are investors watching out for?

Ahead of the MPC outcome, the overall market remained on the sidelines. Apart from the MPC, the US Retail Sales data and China’s CPI data may offer some cues to Indian markets. Investors will also continue to take cues from the ongoing earnings season, said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Ltd.

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