E-Paper
RBI retains policy rate, keeps its growth target
The Reserve Bank of India's Monetary Policy Committee (MPC) has maintained a hawkish stance, ruling out rate cuts until the next general elections. The MPC's tone and actions on liquidity indicate that monetary policy is unlikely to support growth until the second half of 2024. The RBI Governor emphasized the bank's inflation target of 4%, and the MPC could pivot towards a more hawkish stance if there are inflationary pressures. Experts predict that rate cuts are unlikely until the first half of 2024.
Status quo with an increasingly hawkish rhetoric — that would be the best summation of the Reserve Bank of India’s latest Monetary Policy Committee (MPC). While there is no change in the policy rate (it stays at 6.5%), stance of monetary policy, and growth-inflation forecasts for the current fiscal year, MPC’s tone and its hawkish action on the liquidity front means that there will be no rate cuts until the next general elections. This rules out any relief on debt servicing costs for both firms and households.
MPC has retained its inflation and growth forecasts of 5.4% and 6.5% for 2023-24 and projected the corresponding June 2024 quarter values to be 5.2% and 6.6%. The RBI Governor Shaktikanta Das also emphasised the fact that RBI’s inflation target is 4% rather than 2%-6%. Read together, this means that monetary policy is unlikely to pivot towards supporting growth until the second half of 2024. In fact, the tone of both the MPC resolution and the Governor’s statement suggests that MPC could pivot towards a hawkish stance if there is a threat of food inflation pressures feeding into general prices or inflation expectations.
“The need of the hour is to remain vigilant and not give room to complacency. Lessons from the past one and a half decades and from living through the global financial crisis and the taper tantrum tell us that risks and vulnerabilities can grow even in good times,” the Governor’s statement said.
To be sure, an inflation forecast of 6.4% for the quarter ending September 2023 suggests that MPC is expecting a significant easing of the headline CPI number for September which will be released next week. Headline inflation was at 7.4% and 6.8% in the months of July and August.
“We estimate that CPI inflation slowed to 5.3% year on year in September, as vegetable prices fell and administrative LPG price cuts came into effect”, Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays said in a note issued on October 5.
Governor Das also gave a subtle defence of why RBI was not raising rates despite inflation being well above the RBI’s target of 4% in the foreseeable future. “The transmission of the 250 basis points (2.5 percentage points) increase in the policy repo rate to bank lending and deposit rates is still incomplete and hence MPC decided to remain focused on withdrawal of accommodation,” Das said in his statement.
Das also announced a possible resort to Open Market Operations (OMO) in the bond market at to draw out extra liquidity from the system, although he did not specify a timeframe and quantum of such an intervention. “The 10-year benchmark bond yield jumped to its highest level in six months, after Das said RBI could consider open market sales of bonds. The benchmark 2033 bond yield jumped to 7.3412%, against 7.2197% before the policy decision,” Reuters reported.
“The main focus of this policy meeting was liquidity. The governor warned that the central bank may resort to OMO sales, if necessary…And while it has also been selling government bonds in small amounts over the last few weeks, explicitly warning about likely OMO sales was a new feature in today’s policy meeting, and suggests to us that as the RBI moves from temporary to permanent liquidity draining tools, the tight liquidity conditions will continue”, a note from HSBC Chief India and Indonesia Economist Pranjul Bhandari said. “As we have argued before, after delivering 250bp in rate hikes over the last year, the bar for further hikes is high, and de facto tightening via tight liquidity seems to be the preferred option.”
Most experts agree that MPC is unlikely to cut rates until the first half of 2024 and prospects of the economy continuing to do well are feeding into this trajectory of the RBI. “We think any consideration of a pivot towards monetary easing has been pushed to the second half 2024. There are several uncertainties surrounding inflation, as also highlighted by the governor: the impact of uneven distribution of rains on kharif crops, lower reservoir levels, trajectory of international crude-oil prices seeping into input costs for producers, and El Nino’s effect on rabi winter crops,” Bajoria said in a note.
