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Below are Views On MPC Preview by Madhavi Arora, Lead Economist, Emkay Global Financial Services

MPC Preview: The doves are not disturbed

The upcoming policy will see MPC re-emphasising its commitment to keeping policy accommodative for the foreseeable future and maintaining comfortable liquidity. The recent inflation surprises will unlikely to derail their narrative, especially with inflation ahead likely falling back to sub 6% -- within their flexible target.

The MPC will likely maintain that growth is still sub-par -- needs consistent firm traction and continued policy support is crucial for durable growth revival. We do not see any split in voting pattern on accommodative stance.

Yield curve and liquidity management will remain policy focus. The RBI will again assuage markets and continue to ensure that no premature tightening of financial conditions would happen and yields uptick is managed smoothly. Markets would watch any hint on GSAP 3.0 and choice of securities (G-sec/SDL) mix.

While they may reaffirm their preference for VRRRs as first step towards liquidity normalisation, we are unlikely to hear any mention in the upcoming policy.

The policymakers would tread cautiously on this front to see orderly evolution of yield curve, having seen extreme market reactions in the past. That said, we reckon surplus liquidity has led to asymmetric gains in credit markets and excessive risk taking in other asset classes

We reckon the RBI will continue to strive fixing artificially skewed yield curve and maintain its preference for curve flattening.

We expect the RBI to get more accountable and action oriented as we move into 2HFY22. We maintain RBI may have to stretch GSAP/OMOs beyond Rs4.5tn+ to manage impending SLR demand-supply mismatch.

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