RBI Monetary Policy | Market consolidated on 6 out of 10 policy days; what to expect today

The Reserve Bank of India governor Shaktikanta Das will announce the interest rate decision on October 9 after a two-day Monetary Policy Committee (MPC) meeting.

Earlier, the meeting was scheduled for September 29-30 and October 1, but it was postponed due to change in MPC members. The government on October 6 appointed Ashima Goyal, Shashanka Bhide and Jayanth Verma to the Reserve Bank of India's (RBI) panel that sets interest rates.

Majority of experts feel the policy rates may remain unchanged given that the inflation is above the 6-percent mark, but the commentary would be key to watch out for and hope that RBI may reiterate its accomodative stance.

Now the question is how will market react to RBI's decision.

Historical data suggests that on the day of policy, market consolidates. In past 10 years, on six out of 10 policy days market ended in the red. The reason could be that the market prices in RBI's decision in advance is disappointed with the decision.

If we chart the market on the days of last four monetary policies, on three instances the indices gained as the RBI announced measures to support the economy that has been hit hard due to COVID-19 induced lockdown.

RBI has taken various measures to boost the ailing economy such as 115 bps repo rate cut, easing rules for NBFCs, etc.

Bank Nifty, which represents the biggest banks in the economy and are directly impacted by the policy decisions taken by the RBI, closed higher on six out of 10 policy decision days.

"This policy should provide greater insights into the MPC's forward assessment with respect to the inflation and growth trajectories. The RBI may have to resort to more innovative and/or aggressive measures to ensure orderly absorption of government bond supply, without creating much dislocation in the bond markets. To comfort the Gilt markets, especially in the face of a burgeoning fiscal deficit, we would expect RBI to announce an OMO calendar," Unmesh Kulkarni, Managing Director, Senior Advisor at Julius Baer India told Moneycontrol.

The CPI inflation fell moderately to 6.69 percent in August 2020, against 6.73 percent in July 2020, which is still above the RBI target of 4 percent (+/-2 percent). Hence, the RBI is expected to keep more focus to bring the inflation around or below its target level.