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Below the Perspective on RBI MPC Announcement by Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Services

 A benign global narrative, tighter system liquidity and easing core inflation despite stronger growth acted as comfortable backdrops to today’s MPC meeting. The policy tone today was confident on domestic dynamics and on meeting external financing needs, with growth upgrades and comfortable inflation trends despite near-term food-led risks.

 Stance:  Expectedly, there was no change in stance of “withdrawal of accommodation”. We understand the RBI would be biased to keep overnight rates more aligned towards the repo rate than MSF/SDF ahead. A part of this would be naturally achieved ahead. Our estimates suggest system liquidity deficit is likely to ease to 0.5-0.8% of NDTL in the coming months vs. 1.1-1.2% of NDTL in Jan-24, helped by the government's cash drawdown, apart from other factors. A stance change, thus, may wait until April or even later and will give the RBI some elbow room to understand and adjust to fluid global dynamics.

 On rates cut timing, We understand that shifting debates on global narratives requires the RBI to be flexible as well. We have long maintained that the RBI's policy has been somewhat pegged to the Fed, specifically in the last two years, even as it formally targeted inflation. The swift turn of tone and action pivots of the RBI in the last two years have been influenced purely by global narrative. We do not see RBI preceding the Fed in rate cuts.

YC to stay flat: There has been massive flattening in the sovereign YC, especially in the last one month, helped by lower gross borrowing announcement and fall in global yields (partly reversed now), while tighter liquidity has kept the shorter end an elusive trade. We do not expect the trend to change much going ahead, as liquidity deficit would still be above 0.5% of NDTL and could help ease shorter tenor yields only at the margin, while the longer tenor may stay favorable, led by better demand-supply dynamics and lower inflation prints ahead. We think 'playing the steepener' can easily wait till summer.

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