RBI Monetary Policy October 2023 Highlights: RBI maintains status quo, keeps repo rate unchanged at 6.5%

“The Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth and robust earnings growth. The credit growth is broad based and backed by the strong fundamentals of financial institutions. The financial indicators of non-banking financial companies are also in line with that of the banking system as per the latest available data for June 2023. Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress,” Shaktikanta Das said.

Private sector capex, the RBI Governor said, is gaining ground as suggested by expansion in production and imports of capital goods and new projects sanctioned by banks. “Capacity utilisation (CU) in the manufacturing sector, on a seasonally adjusted basis, continued to trend up, which augurs well for investment activity. The total flow of resources to the commercial sector from banks and other sources taken together at Rs 10.6 lakh crore during the current financial year so far is higher than that of last year (Rs 10.4 lakh crore). Merchandise exports and non-oil non-gold imports, however, contracted though at a moderated pace in August. Services exports expanded at a healthy pace,” he said.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services

“A completely in line with expectations policy is neutral from the market perspective. Not only the policy rates but the growth and inflation targets for FY24 remain unchanged. More than this status-quo statement from the MPC, tonight’s job numbers from the US will determine the market trend in the near-term. Rate sensitives like banks will start discounting the positive Q2 results expected in the coming days. The warning from the governor that the central bank will resort to OMOs to absorb excess liquidity if necessary has pushed the 10-year bond yields up marginally.”

The RBI governor said that the services sector activity is maintaining buoyancy as indicated by healthy expansion in high frequency indicators in August-September. “PMI Services exhibited strong expansion in September. Construction activity continues to be strong,” he said.

Manufacturing sector gained ground in July-August 2023, supported by key sectors such as pharmaceuticals, basic metals, cement, motor vehicles, and food products and beverages. The purchasing managers’ index (PMI) for manufacturing remained robust in September, said Shaktikanta Das.

Dharmakirti Joshi, Chief Economist, Crisil

“Steady interest rates with no change in stance was widely expected and par for the course. Despite the second quarter bulge in inflation, the RBI kept its inflation forecast for the current fiscal unchanged at 5.4%.

“Further, the incomplete transmission of past 250 basis-points rate hikes to bank lending and deposit rates reinforced MPC’s imperative to continue its stance of withdrawal of accommodation. Noting resilient economic conditions, the MPC kept its GDP forecast unchanged at 6.5% this fiscal.

“Food inflation remains a key monitorable not only because it is in double digits, but also because sub-normal monsoon and muted sowing can impact kharif output and prices. Additionally, low reservoir levels do not augur well for the Rabi crops.

“Crude oil has seen a lot of volatility of late and there is a reason to be cautious on that front — more due to geopolitical factors than demand, which is slowing and unlikely to drive crude prices up.

“Tightening of US bond yields, capital outflows and strengthening dollar also tilt the balance in favour of ‘withdrawal of accommodation’ stance. We expect rates to remain at these levels and foresee a rate cut only in the first quarter of next fiscal.”

RBI Governor Shaktikanta Das stated that the RBI’s aim is to align inflation to the target on a durable basis while supporting growth. Emphatically reiterate that our inflation target is 4% and not 2 to 6%, he said.

The current account deficit for the first quarter of financial year 2023-24 declined to 1.1 per cent of GDP from a year ago, said RBI Governor Shaktikanta Das.

The RBI has pointed out that heightened inflation levels were largely driven by food prices and vegetables contributed to a third of CPI inflation in the month of July and a fourth in the month of August.

“The RBI’s decision to pause along with retaining the withdrawal of accommodation stance was in line with expectations. Importantly, the RBI has explicitly highlighted the need to use OMO sales to modulate liquidity. This will weigh down bond markets’ sentiments. Concerns on food inflation were highlighted which can impart upside to headline inflation. We believe that inflation risks remain on the upside given weather related impact as well as commodity prices. Global monetary conditions will also weigh on RBI’s policy decisions. The good part is that growth remains resilient and core inflation remains under check. We maintain our call for a prolonged pause on repo rate at 6.5% well into FY2025 while liquidity over the medium term will be aimed at being close to neutral.”

– Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

Vinod Nair, Head of Research at Geojit Financial Services.

“On a positive note, interest rates haven't increased as anticipated, however they are expected to remain elevated for an extended period. This will have an implication on rate-sensitive sectors like banking, auto, core industries, and heavy-weighted balance sheet companies. The elevated global bond yields and appreciation of the US dollar will affect the domestic economy and capital flows. However, it should not have a deep overhang effect on the economy but rather a mixed bias in the short term. The inclusion of government securities in the global bond index and moderation in inflation, like food & international commodity prices, will support rupee and domestic corporate profit even in a volatile global currency market.”

The core inflation eased by 140 bps from its peak in January. The RBI governor said that the future trajectory of inflation will be determined by several factors.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

“The RBI’s decision to pause along with retaining the withdrawal of accommodation stance was in line with expectations. Importantly, the RBI has explicitly highlighted the need to use OMO sales to modulate liquidity. This will weigh down bond markets’ sentiments. Concerns on food inflation were highlighted which can impart upside to headline inflation. We believe that inflation risks remain on the upside given weather related impact as well as commodity prices. Global monetary conditions will also weigh on RBI’s policy decisions. The good part is that growth remains resilient and core inflation remains under check. We maintain our call for a prolonged pause on repo rate at 6.5% well into FY2025 while liquidity over the medium term will be aimed at being close to neutral.”

RBI Governor Shaktikanta Das said that inflation may remain high longer than expected. In his address, the RBI Governor said that the MPC has “identified high inflation as a major risk to macro economic stability and sustainable growth”.

The RBI MPC has kept the repo rate unchanged at 6.5%. Standing Deposit Facility and Marginal Standing Facility rates are also left unchanged at 6.25% and 6.75%.

Shantanu Bhargava, Managing Director, Head of Discretionary Investment Services, Waterfield Advisors Says

“The RBI had overlooked data in the early aftermath of Covid-19 since the aim was to stimulate the economy & engineer a turn-around. Since changing its stance last year, the RBI has been data driven. According to the RBI's inflation prediction for Q3 & this FY, today's policy outcome is not surprising. We expect the RBI to retain the status quo unless we see a durable drop in inflation and if steady economic activity continues.”

India is focussed on macro stability and fundamental growth. The external sector remains manageable. India is poised to become the new growth engine of the world. The twin balance sheet stress is replaced by twin balance sheet advantage, said RBI Governor Shaktikanta Das.

As predicted , the RBI kept both the Policy Rates & Stance unchanged in the Monetary Policy. Right Policy in view of the evolving growth-inflation dynamics.

Manoranjan Sharma, Chief Economist at Infomerics Ratings

RBI has maintained status quo on the policy stance and it is retained at ‘Withdrawal of Accommodation’ with 5 out of 6 MPC members voting in favour of this, said RBI Governor Shaktikanta Das.

Q2FY24 GDP growth forecast unchanged at 6.5%

Q3FY24 GDP forecast at 6.0%

Q4FY24 GDP growth forecast unchanged at 5.7%

CPI inflation forecast for Q2FY24 raised to 6.4% from 6.2%

CPI inflation forecast for Q3FY24 cut to 5.6% from 5.7%

CPI inflation forecast for Q4FY24 at 5.2%

CPI inflation forecast for April-June 2024 unchanged at 5.2%

RBI keeps repo rate unchanged at 6.5%, maintains inflation outlook at 5.4%. RBI’s Monetary Policy Committee has decided to maintain status quo.

Further progress on anchoring of inflation expectations – Near-term inflation expected to soften on the back of reduction in tomato and LPG prices.

Need to watch out for Kharif sowing trends.

Inflation trajectory to be also impacted by El Nino and global food price outlook.

CPI inflation projected at 5.4%

Rural demand showing signs of revival, sustained buoyancy seen in services. Govt continues thrust on capex.

Headwinds from geopolitical tension, uneven monsoon and global economic slowdown pose risk to economic growth projections.

Maintain FY24 GDP target at 6.5%

GDP to soften in subsequent quarters in FY24 with Q4 growth seen around 5.7%

India’s manufacturing activity rose at the slowest pace in five months in September but it remained solid, with strong demand driving business confidence to its highest level this year, despite increased inflationary pressures, according to the S&P Global Purchasing Managers’ Index (PMI). The Manufacturing Purchasing Managers’ Index (PMI) by S&P Global came in at 57.5 in September as against 58.6 in August. S&P Global said that good producers in India noted a mild slowdown in growth during September, nevertheless, a sharp rise in new orders underpinned sustained expansions in output, input purchasing and employment.

Nifty around 19,600, Sensex up nearly 200 points

Bank Nifty above 44,280

India’s retail inflation in the month of August slowed to 6.83 per cent, 61 basis points lower in comparison to the 15-month high of 7.44 per cent in July. This was largely led by vegetables, amidst some moderation in the prices for clothing and footwear, housing and miscellaneous items as well. This is the fourth month when inflation has come in higher than the upper bound of the Reserve Bank of India’s (RBI) tolerance level. The RBI has the mandate to keep retail inflation in the range of 2 to 6 per cent and after remaining above the upper limit for most of the 2022-23 financial year, inflation was in the central bank’s comfort zone this fiscal till June when it was at 4.87 per cent.

“The economy is looking robust with high investments across businesses in recent times. We expect a continuation of existing policy rates through 2023 and undoubtedly, a further reduction in interest rates in the near future would be preferred to bolster overall market confidence and make it more enticing for home buyers. With the ongoing festive season, we are already witnessing a surge in inquiries and we are expecting around 20 per cent growth compared to last year’s festive season. India’s real estate market is one of the most dynamic and fastest-growing in the world. As long as the macro fundamentals are stable, demand for real estate will continue to grow. The Indian real estate market is booming and being a part of its growth can extend favourable returns in the future.”

According to last monetary policy, RBI is expecting India’s real GDP to grow at 6.5 per cent in FY24, making India one of the fastest-growing major economies in the world. However, concerns about slowing global growth and higher interest rates globally can lead to a slowdown in Indian economic activity. JP Morgan Chase & Co. decided to include India in JP Morgan Government Bond Index–Emerging Markets Global Diversified Index (GBI-EM GD) with a 10 per cent weight cap and the index suite (benchmarked to the GBI-EM family of indices) in a staggered manner over a 10-month period, beginning June 28, 2024. This can enhance the liquidity and ownership base of G-secs (currently <2 per cent) and help the country finance its fiscal deficit and overall, balance of payment.

– Abhishek Bisen, Head of Fixed Income & Fund Manager, Kotak Mahindra Asset Management Company

Read detailed analysis here.

India’s headline inflation reached 7.8 per cent in July. However, in August, it moderated to 6.8 per cent. During the August monetary policy meeting, the RBI adjusted its forecast for retail inflation in the fiscal year 2023-24, increasing it to 5.4 per cent from the previous projection of 5.1 per cent made in June.