Most economists and market watchers expect the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to hold the key repo rate at 6.5% when it announces the monetary policy on Friday.
They also believe the stance will be left untouched at “withdrawal of accommodation” even though crude oil prices have fallen below the $75 mark.
The majority expects the RBI to raise it growth forecast for FY24 to 6.7% from 6.5% following a strong showing in Q2FY24, even though the consumption side is not faring so well. As some experts have pointed out, the proxy indicators that are used to assess the informal sector within the GDP data, have surprised on the downside. The infrastructure and investment parts of the economy, however, are doing much better.
The good news is that higher growth does not seem to be stoking inflation as seen from the relatively benign core inflation which is at its lowest in 43 months. However, in the near term, headline CPI inflation could go up to 6%, driven up by food inflation as prices have been going up. The RBI is expected to stress this point.
Experts have pointed out that while rates have not been hiked, there has been some stealth tightening via liquidity where the rates are ruling at the upper end of the corridor. Moreover, the higher risk weights for unsecured and other loans will lead to some more policy transmission.
The bond markets will look for more clarity on where the central bank wants system liquidity to be. Currently, overnight rates have been ruling about 10-15 bps above the repo rate while durable liquidity in the system is around Rs 2-2.5 trillion. Experts believe that should fresh durable liquidity be created—arising from dollar inflows — the RBI would move to sterilise it by employing Open Market Operations.
Globally, the environment is looking much better than it was a few months back, especially in the US, where the prospects of a soft landing are now much higher. The dollar is weaker and US treasury yields have come off by about 75 basis points from the levels of 5%.