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What Could Be The RBI’s Take On Monetary Policy Review

Indian bonds are likely to extend their rally in the coming weeks as the central bank is seen tempering its hawkish tone at the monetary policy review next Wednesday, comforted by lower consumer price inflation in April. However, traders feel it is too early for the Reserve Bank of India to change its monetary policy stance based on one inflation print and they will be closely following the RBI’s tone at the policy review for more clarity on further rate actions. They expect the RBI to wait for at least 3-4 inflation data before changing its stance.

The yield on the old benchmark 6.97% 2026 bond, which has fallen about 20 basis points from a nearly 9-month high of 6.99% on May 2, could decline by another 15-20 basis points if the RBI maintains a neutral tone, traders said.

 “The RBI will be cautious, but not hawkish. They will acknowledge that inflation has fallen. Also, they cannot ignore that the government has come out with a better-then-expected GST formula,” said Naveen Singh, senior vice president at ICICI Securities Primary Dealership.

Kotak said the GST rates will likely lead to about 20 bps fall in CPI inflation, assuming smooth implementation and efficient input tax mechanism, with most goods’ rates broadly unchanged and in some cases lower and only a few services seeing some uptick.

However, the benchmark bond yields could go up by 15 to 20 basis points if the RBI continues to be hawkish, traders said.

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