"Don't Expect A February Style Dovish RBI Policy": HDFC Bank

As the Reserve Bank of India's (RBI) monetary policy committee is set to announce its decision on key rates tomorrow on April 8 and though there might be a consensus building to keep repo and reverse repo rates unchanged, HDFC Bank's treasury research team has indicated that markets could be in for a surprise if they expect the central bank to sing in line with the dovish tune delivered in the February policy.

In its note, the HDFC Bank research team has pointed out that the global as well as domestic outlook has undergone a significant change since the last RBI policy in February 2022.

"Geopolitical tensions and the increasing hawkishness from the US Fed has a bearing on everything from inflation to the rupee to yields. While it is true that there are countries that are deviating from the Fed's hawkish rhetoric - and India perhaps has some space to keep rates unchanged for now, but a prolonged deviation could be destabilising. We think its perhaps time that the RBI could start aligning itself with other major central banks. At least domestic conditions warrant or justify such a shift sooner than later," it noted.

HDFC Bank further said that inflation pressures are building, not only because of petrol and diesel prices climbing, but also due to higher transportation costs, which are feeding into prices of almost all other goods.

"We suspect that RBI could recognise these inflationary risks and might even go as far as providing some hint towards a change in stance to neutral in its forward guidance. This could be justified by an upward revision in the RBI's inflation forecast from 4.5 per cent to 5.2 to 5.5 per cent average for 2022-23 while growth projections could remain unchanged at 7.8 per cent for this fiscal," the bank said in its research note.

Moreover, as the economy emerges rom the pandemic, a high liquidity surplus is perhaps also not justified and the central bank could look at reducing the same over the coming months. This would again  clash with keeping yields range bound. The recent dollar-rupee swap of $5 billion does open space  for bond interventions in the near term but the quantum of the same remains small in rupee terms, HDFC Bank noted further.

"Beyond a point orchestrating this fine balance between a range bound rupee, no rate hikes, liquidity surplus, moderate inflation and a cap on yields could become difficult, especially with global pressures rising," it explained.