RBI monetary policy meet expected to be non-event with dovish undertone: Emkay

As the Reserve Bank of India (RBI) gears up for its upcoming Monetary Policy Committee (MPC) meeting, market sentiments remain subdued, with expectations leaning towards a non-event scenario. According to brokerage firm Emkay, the consensus anticipates a dovish tone akin to December 2023, yet falling short of any substantial stance change.

Analysts foresee the RBI maintaining a cautious stance amid a backdrop of a healthy budget and a globally comfortable narrative. While no significant alterations in the assessment of macro variables are expected, the central bank is likely to prioritize ensuring financial stability amidst fluctuating external dynamics.

A key aspect of the RBI's policy approach, according to market observers, has been its alignment with the Federal Reserve's actions, particularly in recent years. This synchronisation, primarily influenced by global factors, has seen the RBI swiftly adjust its stance and actions, often prioritising financial stability over inflation management.

However, questions arise regarding whether the RBI could potentially precede the Fed in policy shifts. The current environment, characterised by a stable risk appetite and low volatility in risk assets, has provided emerging markets, including India, with a comfortable breathing space to offer higher risk premia.

Market indicators suggest a 60 per cent probability of the first Fed rate cut by May 2024, with domestic policy normalisation anticipated by February, including rate cuts in June and October. Yet, the RBI is expected to refrain from early rate adjustments, mirroring the Fed's cautious approach. Analysts predict that the RBI will likely follow the Fed's lead with a time lag, maintaining its policy stance without preceding the Fed in any policy reversal in 2024.

Regarding system liquidity, recent trends indicate tightening conditions, prompting speculation on a formal change in the RBI's stance. While liquidity deficit has eased in recent weeks, analysts suggest a potential stance change may wait until April to allow the RBI to adjust to evolving global dynamics adequately.

In navigating the yield curve ahead, analysts advise caution, noting a significant flattening in the sovereign yield curve, especially in the shorter end, amidst tighter liquidity conditions. Playing the yield curve may require patience, with a potential opportunity to 'play the steepener' emerging in the summer months, Emkay added.