What guidance to expect from first MPC of new financial year

GDP growth remains robust and is expected to keep up the momentum. Liquidity situation has also been comfortable with durable liquidity near neutral levels and banks credit to deposits ratio running high at ~80% vs 75-76% pre-covid.

In such a situation where all the domestic factors that affect the policy are well balanced, what to expect from the upcoming monetary policy review meeting?

Domestic is one part of the question, the other side being global developments and how its going to shape the domestic outlook.

Talking of the global situation, the first economy that one turns to is the US and how the Fed's looking at interest rate.

In the current scenario, even though inflation has been marginally higher than their target and economic activity has remained fairly stable, Fed has indicated that not acting for too long can disrupt the chances of soft landing and thus current guidance is factoring in a start of rate cut cycle in the second half of 2024.

Other economies that matter such as the Eurozone, BOE and China has also hinted at rate cuts soon to support their economies

This brings one back to the domestic situation, in hindsight when one looks back at global markets rate hike cycle, the developed markets have gone for ~400bps + rate hikes whereas India hiked only by 150bps.

Instead of rate hikes, decided to take indirect ways of managing the situation, that is through liquidity management which effectively translated into rate hike by tightening liquidity and pushing short term rates higher.

Therefore, it might not be unimaginable that when global central banks are going for rate cuts, RBI may opt for tweaks through liquidity operations or changing the stance rather than going for deep rate cuts.

Another fact to be considered is because of the aggressive rate hike cycle, the US10Y treasury has moved to~4.20% levels, whereas India due to macro stability and bond inclusion has maintained fairly stable levels at ~7.05%.

If one were to evaluate based on historic spreads and future rate expectations the scope of action gets limited. Historically spread between India and US benchmark has been ~500-550bps, currently they are running at ~280bps.

This is way less than the historic average, in course correction when US may go for deep rate cut cycle, India in order to restore the spreads to keep attracting foreign investments may opt for a shallow rate cut cycle.

Also, India’s bond inclusion in JP Morgan and Bloomberg indices puts further burden to keep the India benchmark rates competitive.

With government borrowing brought down and increased demand not only through domestic institutions but also FPIs pouring in to reap the benefit of global bond indices.

The demand for Indian g-sec has been constant, therefore the benchmark rates are already factoring in demand heavy rates.

To wrap up, RBI in near term is expected to hold the rate steady, as far as the stance goes there is a likelihood that it could change to “neutral”, from the current “withdrawal of accommodation” in near term.

The overall rate cut cycle also may be shallow given that the rate hike cycle was not aggressive, but demand supply dynamics and global developments are going to set positive spin to the domestic markets.

(The author is CIO – Fixed Income, Mirae Asset Investment Managers (India))

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of the Economic Times)