The Reserve Bank of India (RBI) announced its fourth bi-monthly monetary policy today, October 6. The RBI Governor Shaktikanta Das-led Monetary Policy Committee (MPC) maintained the status quo on rates and attitude, as expected. The MPC unanimously opted to maintain the policy repo rate at 6.50%. As a result, the standing deposit facility (SDF) rate continues at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate both remain at 6.75%. The MPC also resolved, by a majority of 5 out of 6 members, to maintain its focus on gradually withdrawing accommodation to ensure that inflation gradually aligns with the objective while sustaining growth.
According to Governor Das, headline inflation in the first quarter of the current fiscal year was 4.6%. In the first quarter of 2022-23, however, it was 7.3%. The repo rate has risen by 250 basis points (bps) since May of last year.
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Shanti Ekambaram, Whole-Time Director, Kotak Mahindra Bank Ltd, said As expected, it was a “ status quo” policy with a renewed emphasis on the inflation target of 4% and resilient macro-economic indicators. Both the economic growth and inflation estimates for the year have been maintained with a commitment to ensure adequate liquidity for supporting growth. The stance remains “withdrawal of accommodation”. Economic trends hint at strong underlying growth trends and healthy credit growth. Even as urban consumption remains robust, the rural markets are showing a promising revival. Overall, a hawkish policy and RBI remains watchful of emerging global volatilities for any policy action to ensure continued price and financial stability.”
Governor Das identified geopolitical tensions, a global economic slowdown, and an erratic monsoon as important risks to the outlook. Inflation forecasts for fiscal year 2024 remain steady at 5.4%. Inflation is expected to reach 5.2% in the first quarter of fiscal year 2025, according to the RBI.
The inflation forecast for the second quarter of fiscal year 2024 has been lifted to 6.4% from 6.2%, while the forecast for the third quarter has been reduced to 5.6% from 5.7% previously.
Poonam Tandon, Chief Investment Officer at IndiaFirst Life, said “The RBI kept the policy rates unchanged with the repo rate at 6.5% on expected lines, maintaining the status quo for a third consecutive time. The committee stated that transmission of the 250 BPS rate hike is still incomplete and working through the economy. The global outlook remains challenging with the global financial landscape rapidly changing and potential risks may emanate. The RBI is closely monitoring the situation and will act proactively to maintain financial stability. On the domestic side, economic activity remains resilient with risk evenly balanced. FY24 GDP growth was maintained at 6.5%. The RBI reiterated its FY24 inflation target at 5.4% while remaining watchful of the inflation outlook due to a fall in kharif sowing, lower reservoir levels, and volatile global food and energy prices. Inflation surged in July and August driven by higher tomato and vegetable prices while it is expected to ease in September. The committee mentioned that the Indian banking system continues to be resilient and banks having surplus funds should consider looking at lending to the interbank call market. It stated that I-CRR will be discontinued in a phased manner. Also, RBI will remain nimble and may consider open market operations with regards to G-secs to manage liquidity. Overall, RBI identifies high inflation as a major risk to macroeconomic stability and sustainable growth and remains committed to achieving the target while effectively managing liquidity.”
Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank, commentary on RBI Monetary Policy, said, “ As expected, the RBI delivered a status quo policy, keeping both its stance and policy rate unchanged. The central bank also kept its growth and inflation forecast unchanged for FY24 continuing to sound cautious on inflationary risks.”
“More importantly, given the pulls and pressures on liquidity conditions in the coming months, the RBI did not announce any durable liquidity absorption measures for now (like CRR hike) in line with our expectations. However, signalled that if required, they are open to the option of conducting OMO sales to manage liquidity conditions. This signals the RBI’s preference for tighter liquidity conditions going forward driven both by inflation risks and financial stability concerns as liquidity tightens globally. This also aligns with the central bank’s reiteration that they want to anchor inflation at 4% and keeping it below the upper band of the target range (at 6%) is not enough.”
“10-year yield is likely to trade higher with the door being opened for OMO sales. Moreover, elevated US yields could also continue to exert pressure in the near-term. For macro indicators, we expect September inflation print at 5.3% and full year to average at 5.4%.”
Achala Jethmalani, Economist at RBL Bank said “In line with our expectations, the MPC maintained a status-quo on policy rates and stance. We view it as a ‘hawkish hold’ on policy rates as the focus remains on bringing inflation down to the 4.0% target. The RBI’s comments on existing banking system liquidity is indicative of tighter system liquidity conditions continuing as it stands ready to deploy all its tools to absorb excess system liquidity. Brace for a long pause on the Repo Rate with tighter liquidity conditions. This is expected to complete the policy transmission in this hiking cycle with the objective of keeping borrowing costs high. The resilience in economic growth despite the restrictive financial conditions underpin the RBI’s move to tighten the liquidity conditions.”
Nikhil Goyal, Founder & CEO, Beyond Imagination Technologies, said “A stable repo rate is a fundamental element in shaping the economic landscape. Its steadfastness offers a sense of reliability, which is particularly vital for businesses that thrive on innovation and emerging technologies, like blockchain. Unchanged rates provide businesses with the continuity needed to plan and execute long-term projects, further bolstering our commitment to advancing blockchain solutions.
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The RBI’s decision to maintain interest rates also carries a broader economic impact. It contributes to economic stability, which, in turn, can positively influence investment in transformative technologies like blockchain, potentially opening doors for more innovation and growth in this sector.”
Madhavi Arora, Lead Economist, Emkay Global Financial Services on RBI MPC Announcement, said “The RBI reiterated caution and the current policy narrative is still more hinged to inflation uncertainty and liquidity management than on the fluid and uncertain global narrative as markets reprice ‘higher-for-longer’. As global financial conditions transmit with a lag, there could be further volatility ahead. Even as domestic inflation is likely to meet policy targets by end-FY24, elevated DM rates and record-low interest differentials pose a headwind for the RBI. Amid the changing external dynamics, the policy prerogative would ensure financial stability, which may possibly even precede inflation management in coming months.”
Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company, said “The RBI Governor mentioned that the pitch is turning and we will play the ball on merit. Today’s policy is like Kapil Dev Policy. It will manage liquidity, inflation, growth, rupee and financial sector stability in an appropriate equilibrium like a legendary all-rounder Kapil Dev managed bowling, batting, fielding and captain ship. The RBI has worked hard to create a balance between growth and inflation setting an example for rest of the world. This policy continues to take that hard work forward.”
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