The Monetary Policy Committee (MPC) of the Reserve Bank of India kept the benchmark repo rate unchanged at 6.50% and retained its tightening stance, signalling a longer timeframe for rate cuts. While the rate pause decision was unanimous, the decision to retain the stance as “withdrawal of accommodation” had one dissenting voice – that of external member Jayant Varma – in the six-member MPC.
“It is a pause in this meeting of the MPC and I have not said anything about the pivot. Whatever I said in the last meeting – that it is not a (policy) pivot – I reiterate that,” governor Shaktikanta Das told reporters after the monetary policy announcement.
Also read: RBI relaxing borrowing limit in interbank call market no ‘game changer’: Traders
“Our goal is to achieve the inflation target of 4% and keeping inflation within the comfort band of 2-6% is not enough,” Das said.“Inflation should align with 4% target on a durable basis, not a one-off basis,” he said after trimming the RBI’s inflation forecast to 5.1% from 5.2%. “It is always the last leg of the journey which is the toughest,” he added.
Analysts, however, do not expect inflation to fall to the RBI’s 4% medium-term target in a sustainable manner for some time. Abheek Barua, chief economist at HDFC Bank, said “any rate cut expectations in 2023 that were being built up in the market are likely to be pushed forward for now”. He added the RBI seems to be building in a buffer for any food prices spikes due to weather related disturbances during the monsoon season. If indeed these risks do not pan out, inflation could be lower than the RBI’s projections leading to subsequent communications becoming more dovish.
“The vigilance on inflation has been reiterated, indicating that the MPC is not ready to lower its guard on prices despite recent positive surprises,” said Anubhuti Sahay, South Asia chief economist at Standard Chartered. Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, said he expects the RBI to remain on hold for the rest of fiscal FY2023-24, with an emphasis on macro stability.
The benchmark 10-year bond yield was a tad higher at 7.01%, against 6.99% before the policy decision. The rupee was little changed at 82.5550. Stocks declined, paring earlier gains.
Among other decisions, RBI has allowed banks to issue Rupay prepaid forex cards. With this, the central bank also expanded the scope of the e-rupee voucher.
Also read: RBI’s actions are on the right path
In his speech, Das said unlike the previous three “tumultuous years”, the uncertainty on the horizon appears “comparatively less” and that the path ahead is “somewhat clearer”. However, the RBI still has to be acutely aware that the geopolitical conflict continues unabated, and policy normalisation globally is far from complete.
“Domestic macroeconomic fundamentals are strengthening, economic activity is exhibiting resilience; inflation has moderated; the current account deficit has narrowed; and foreign exchange reserves are comfortable,” Das said.
The MPC noted that while wheat prices could see some correction going ahead on account of robust mandi arrivals and procurement, milk prices are likely to remain under pressure due to supply shortfalls and high fodder costs. Further, the forecast of a normal southwest monsoon by the India Meteorological Department (IMD) also augurs well for kharif crops.
However, the spatial and temporal distribution of the monsoon would need to be closely monitored and though the crude oil prices have eased, the outlook still remains uncertain. Also, according to the early results from the RBI’s surveys, manufacturing, services and infrastructure firms expect input costs and output prices to harden. A clearer picture will only emerge when the final survey results are out.
For Q1FY24, the consumer price inflation forecast has been cut sharply to 4.6% from 5.1%, Q2 estimate has been lowered from 5.4% to 5.2%, while the estimate for Q3 and Q4 has remain unchanged at 5.4% and 5.2%, respectively.
“Given the uncertainties, we need to maintain an Arjuna’s eye on the evolving inflation scenario,” Das said.
The MPC statement said that a higher crop production in FY23, expectation of a normal monsoon in the current fiscal and the sustained buoyancy in services sector should support private consumption and overall economic activity in the current year.
Further, the Centre’s thrust on capital expenditure, moderation in commodity prices and robust credit growth are expected to nurture investment activity, MPC said, adding that factors such as weak external demand, geo-economic fragmentation, and protracted geopolitical tensions pose risks to the outlook.
Accordingly, the RBI has maintained its earlier forecast of 6.5% real GDP growth in FY24, with Q1 real GDP estimated to rise by 8% as against 7.8% earlier and Q2 estimate at 6.5% versus 6.2% earlier. For Q3 and Q4, however, the real GDP growth estimates have been cut down to 6% and 5.7% from 6.1% and 5.9% earlier, respectively.
Das said that surplus liquidity, as reflected in average daily absorptions under the liquidity adjustment facility (LAF) at Rs 1.7 trillion during April-May, was lower than Rs 2.9 trillion during FY23. The shrinkage in surplus liquidity was, among other factors, due to the maturing of targeted long-term refinancing operation (TLTRO).
Further, the seasonal expansion in currency in circulation and build-up of government cash balances during this period also moderated surplus liquidity. Since the third week of May, however, the decline in currency in circulation and pick-up in government spending have expanded the system liquidity, Das said, adding that systemic liquidity will further rise due to central bank’s money market operations and deposit of Rs 2,000 banknotes in banks.
Das said that the central bank would remain “nimble” with its liquidity operations amid spikes in overnight rates despite surplus liquidity in the banking system.