The RBI policy review is likely in the next week.
“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,” said Pathak.
I think, RBI’s decision on stance will be more dependent on managing market’s perception than inflation and liquidity outlook, said Pathak. He added that 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 a 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.”
