RBI MPC policy review: Sandeep Yadav, Head - Fixed Income, DSP Mutual Fund

7 Jun 2024 , 01:36 PM

The monetary policy did not throw any surprises, evidenced from the muted market reaction. However, there were three things that came out.  Unlike previous times, the rate pause was not a unanimous decision with two members calling for a rate cut. While it doesn’t mean that we expect a rate cut in next policy, it shows that RBI is gradually moving towards a rate cut regime. RBI has also clearly disassociated their rate actions from the US FED. While RBI does look at domestic compulsions before taking rate decisions, it has to also look at the collateral damage of the currency – just like any other EM central bank. This is prudent, and we believe RBI has been following it – and will probably follow it when it cuts the rates. RBI mentioned that they prefer to keep overnight rate close to repo rate. This seems at odds with the data from past year. Many times, the overnight rate has diverged from Repo, and it probably was through RBI’s intent via VRR and VRRR. Thus, by today’s statement we believe that the future course of liquidity management will change, and RBI may keep overnight rate at Repo rate.