– By Abhishek Bisen
RBI playing like Gavaskar against the West Indies bodyline – Fed hiked again and RBI ducked again, believing in the domestic macro fundamentals of our country. Amidst the mayhem around the developed world raising rates, RBI paused for third time in a row, kept the repo rate unchanged and stance as “withdrawal of accommodation”.
In the third bi-monthly monetary policy of FY24, the RBI kept the repo rate unchanged at 6.50%. Since May 2022, there has been a cumulative rate hike of 250 basis points undertaken by the MPC which is working its way into the economy as per the RBI. As per RBI, the monetary transmission is still underway, the MPC decided to remain focused on withdrawal of accommodation to ensure that inflation aligns to the 4 per cent target, while supporting growth.
They have decided to act on the liquidity as the level of surplus liquidity in the system has gone up in the recent months on the back of return of ₹2000 banknotes to the banking system, they have hiked I-CRR (incremental cash reserve ratio) by 10% which will effectively take away about 90-100k crore liquidity from the banking system. This is a very short-term measure and shall be reviewed on 8th Sep or earlier.
CPI inflation is likely to overshoot 6% YoY in July 2023. The spike in the tomato prices and further increase in prices of cereals and pulses have contributed to this. Consequently, a substantial increase in headline inflation would occur in the near-term. Crude oil prices have firmed up in recent weeks and its outlook is clouded by demand-supply uncertainties. However, RBI shall look through the near-term spike in inflation which will be caused by the factors stated above. Overall, the inflation forecast was upped by 30 bps for FY24 to 5.40% from 5.10%. Real rates in India remain in upwards of 1% which is well balanced. The GDP growth forecast has been maintained at 6.5%
India has been enjoying the goldilocks scenarios for some time now, with inflation well anchored at ~5% and GDP growth above 6% mark, making it the fastest growing economy. What could put the spanner in the wheel? The key risk may be coming in from global factors especially crude oil shock or if the US FED decides to hike again in September 2023. The FED has been fighting inflation for some time now and has hiked its target rates by 25 bps to 5.25-5.50% in the last policy, and it is possible that they will raise rates again depending on the incoming data. If we look at recent inflation data in the US with headline at 3% and core at 4.80% there has been reasonable softening in the inflation from the peak and more over the inflation data has been surprisingly positive so far. If the Inflation stays broadly in line as per the projection, the Fed may not need to raise more rates. However, the FED may remain hawkish and keep rates at the current level till the inflation is well anchored in the comfort zone.
Overall, a well-crafted and balanced policy both in terms of action and message. The governor said explicitly that the MPC can look through perishable food price shocks “for some time”, but recurring shocks may be a problem, particularly as they pose a risk to anchoring inflation expectations. Hence RBI is in “Wait and watch” mode and the bar for any rate action is high.
(Abhishek Bisen is the head – fixed income at Kotak Mahindra Asset Management Company.)
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