Monetary Policy: Stability From A Prolonged Hold

As far as policy rates are concerned, it is going to be a period of prolonged hold. The Monetary Policy Committee of the RBI, in its meeting decided to keep the base rates unchanged. This is in line with the general expectations. This is also in alignment with the RBI’s objectives of controlling inflation, and at the same time promoting economic growth. The inflation levels have come down, and it is within the RBI’s target range, and growth rate too is robust going by the Q2 GDP number at 7.60 %. RBI has indicated that it will progressively withdraw the accommodation. This is reflected in the money market liquidity management by the RBI. The interbank liquidity is at equilibrium with no major shortfalls or surpluses. The call money rate has been hovering around the 6.75 % level in the last three months and it does not reflect any strain as such. RBI statement says, “monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission. The MPC will remain resolute in its commitment to aligning inflation to the target. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.”
The last CPI number for Oct. 23 was at 4.90 %, and core inflation has come down to 4.23 %. The average retail inflation is projected at 5.40 % for 2023-24. The projected numbers for Q 3 and Q 4 of the year are at 5.60 % and 5.20 % respectively. Inflation is expected to be under control as we move into the next financial year. Food and fuel prices are volatile and need to be monitored closely, for their likely impact. However, as of now, the two variables have moderated.

The policy highlights the improvements that are happening in the economy which are going to help economic growth. These include pick up in manufacturing activity, construction, the recovery in the rural economy, and improved household spending. These gains in production and consumption are further supported by increased public and private capex, healthy balance sheets of banks and corporates, and enhanced business optimism. Based on these positive factors the GDP growth for 2023-24 is projected to be 7.00 %. The GDP growth for Q3 and Q4 are projected to be 6.50 % and 6.00 % respectively. Geo-political risks, in the form of escalation of conflicts, if it arises, may impact growth adversely. This picture of the economic growth supports buoyant equity markets.

In the light of the prolonged hold, and the improving macro and market conditions, market rates will be stable to lower, and will have a downward bias with increasing expectations of lower rates over the next one or two quarters. Your attention is invited to two recent notes titled – FinSights- “Invest in Gilt Funds”, Nov 6,2023, and “Gilt & Corporate Bond Funds”, Nov,2023, for a detailed exposition of the underlying factors that enable benign market yields. It also highlights the changing dynamics on account of better liquidity management, buoyant tax collections, lower inflation, and developed economies halting their interest rate action etc., that would help investments into duration products with a 1–2-year time horizon.

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