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Below are Perspective on today's RBI's MPC announcement by Madhavi Arora, Lead Economist, Emkay Global Financial Services

The MPC expectedly kept the key rates unchanged unanimously and reiterated its accommodative stance both on rates and liquidity. However, Prof Jayanth Varma’s dissent on continuation of accommodative stance for foreseeable future continues to keep MPC in split state. The possible hike in fixed reverse repo was a close call and it seems the RBI gauged that markets need to be assuaged over material tightening of financial conditions ahead as global dynamics change and decided to stay put.

The gradualist approach toward liquidity and rate normalization may be challenged by various global and domestic push-and-pull factors. Nonetheless, a huge bond supply in FY23 (even with upside surprise on tax revenues) will require the RBI’s invisible hand in a more visible fashion, implying return of a pre-committed GSAPs going ahead. An uncomfortable RBI may neutralize that with CRR hikes, albeit it will face some communication challenges.

We note the macro adjustment owing to changing global and domestic dynamics has so far been borne by the rates market while the FX market has been resilient. Amid ultra-elevated term premia, India’s current real rates look reasonable vs. EMs, given the present crosscurrents. This could give some leeway to the RBI to conduct shallow normalization.

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