What are equity and bond market investors expecting from RBI policy?

RBI governor Shaktikanta Das-led Monetary Policy Committee is huddled on Mint Street for its three-day policy meeting. The outcome is scheduled to be announced tomorrow, and market watchers will be eyeing the governor’s revised economic projections and the interest rate trajectory. The fact that global backdrop has deteriorated significantly since the last MPC review in February is already priced-in by the markets. Higher food and oil prices due to the Russia-Ukraine conflict and a hawkish US Fed, too, have been absorbed by market participants. Yet, this discounting of information doesn’t make policy-setting easy for the RBI. There are upside risks to inflation, downside risks to growth and an uneasy Balance of Payment scenario staring India in the eye. Thus, it’s the commentary of the governor that will be watched by Dalal Street on April 8.

According to Radhika Rao of DBS Bank evolving risks are likely to challenge the RBI’s sanguine view on FY23 inflation, prompting a 50-100bps upward revision in the CPI inflation forecast. On the other hand, growth risks are likely to be highlighted on the back of a weak run rate in India’s December quarter GDP and fresh global headwinds. Rao says a change in stance from accommodative to neutral will signal a readiness to switch policy gears in the coming months, but a subdued growth view might keep the MPC from an imminent shift. But, the Street could be in for a negative surprise if the RBI’s revised projections are worse than what the market expects. Meanwhile, bond markets are pinning their hopes on the central bank stepping in to manage bond-market liquidity at this week’s policy review. Overall, the RBI is expected to extend its unwavering support to growth during its first bi-monthly monetary policy of FY23. But, if the global backdrop continues to be challenging, domestic policy-setting would involve trade-offs.

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