As Indian markets navigate volatility of election verdict clamor, market participants will now shift their focus to the Reserve Bank of India's (RBI's) monetary policy decision due on June 7. Analysts expect the central bank to maintain status quo for the eighth consecutive time, keeping interest rates unchanged at 6.5 percent, making the policy decision a non-event for the markets.
Even as several market experts expect the RBI to start cutting rates only from the third or fourth quarter of FY25, the June MPC will be an important one to map out RBI Governor's commentary on inflation trajectory and future rate cut path.
"RBI is likely to maintain status quo until inflation is brought within the target range of 4 percent. The market will now focus on inflation and GDP forecast for FY25. Any reduction in inflation and increase in GDP trajectory will be taken as a positive cue by investors," said Vinod Nair, head of research at Geojit Financial Services.
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India's consumer price index (CPI)-based inflation eased to a 11-month low of 4.83 percent in April from 4.85 percent in March, but food inflation continues to remain stubbornly high at 8.7 percent.
Additonally, investors will keenly watch out if there is any fresh measure to address current liquidity squeeze, said Mahendra Kumar Jajoo, CIO-Fixed Income of Mirae Asset Investment Managers.
"Liquidity has remained in deficit with a fresh build-up of cash balances with the government of India. However, govt spending is expected to pick up with elections getting over soon. Further, flows associated with the inclusion of Indian government bonds in the JPMorgan index are also scheduled to start pouring in from June," he said.
ALSO READ: RBI seen holding rates on Friday as economic growth stays robust
Last month, the liquidity deficit increased to Rs 2.32 lakh crore due to reduced government spending and outflows related to goods and services tax.
Indian bond yields have retreated in recent weeks, and Jajoo expects market yields to soften further if the guidance turns more supportive.
Furthermore, the US Federal Reserve's policy decision on June 12 may also influence market sentiment, noted Sunil Damania, Chief Investment Officer at MojoPMS.
The RBI began its three-day monetary policy committee (MPC) meeting on June 5 and will share its decision on June 7. The last time RBI hiked its interest rate was in February 2023.
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