– By Abhishek Bisen
The RBI concluded its second MPC meeting for FY24, unanimously deciding to pause the policy repo rate at 6.5 per cent while keeping all other rates unchanged. However, the MPC voted 5:1 in favor of maintaining the stance of “withdrawal of accommodation”. The policy announcement was as expected, and the 2 basis point increase in the 10-year benchmark rate to 7 per cent was largely influenced by a 10 basis point spike in the 10-year UST, possibly due to a surprise rate hike by the Bank of Canada.
The GDP outlook remains robust, with overall GDP growth maintained at 6.5 per cent for FY 2024. Economic activity has been strong, supported by high-frequency indicators indicating robust consumer confidence and a positive business outlook. Favorable economic conditions are conducive to the capex cycle in 2023-24, and the risks for the year are balanced overall. In terms of inflation, the RBI has slightly lowered the projection for headline CPI in FY 24 by 10 basis points to 5.10 per cent. Easing has been observed across various categories, and with the expected behavior of fuel prices and a normal monsoon, the better output from the Rabi crop is expected to keep inflation benign.
In early May, the RBI took the decision to withdraw Rs 2000 denomination notes from circulation, representing an outstanding amount of Rs 3.62 lakh crore (about 10.8 per cent of the currency in circulation). Additionally, the RBI has approved an Rs 87,416 crore dividend payout to the central government for FY23, surpassing the budgeted amount. Consequently, banking system liquidity has eased to comfortable levels recently, with a decline in currency circulation, increased government spending, and the RBI’s efforts to rebuild foreign exchange reserves over the past few months. The RBI will continue to actively manage liquidity on a day-to-day basis.
The RBI has highlighted that global uncertainties persist due to inflation being higher than central banks’ targets. Some central banks, such as the Bank of Australia and the Bank of Canada, are still distant from neutral, having hiked rates after a brief pause. The decision of the FOMC is awaited, and the future path remains unclear as to whether they will pause or increase the target rate.
Overall, the policy announcement was well-crafted, considering the diverse global factors at play. The RBI has effectively focused on inflation and pursued the target of 4 per cent, acknowledging that no immediate action may be needed to achieve it. Given the favorable long-term inflation outlook, the RBI appears to be comfortable with the current flat yield curve. As India finds itself in a favourable macroeconomic situation, the RBI shall carefully keep walking the current path. The RBI has pushed the change of stance to neutral for at least one more policy, and it is likely that yields will move sideways with downward bias.
(Abhishek Bisen is the Head of Fixed Income & Fund Manager at Kotak Mahindra Asset Management Company.)
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