RBI Policy: India Too Higher For Longer

The RBI decided to maintain status quo on the rates front and continue with its stance of withdrawal of accommodation to progressively achieve its inflation target of 4%, while supporting growth. While the policy was on expected lines on the rates front, the major surprise was in the form of governor mentioning OMO-sales in his statement to manage liquidity.

The easing in core inflation and the expectations of food prices normalising were the critical factors sighted by RBI in maintaining status quo. Further, the RBI governor mentioned in his statement that, “Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points
which is still working through the economy, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting.”

On Growth:
In its assessment for growth the RBI has showed confidence in the resilience of the domestic economy on the back of “sustained buoyancy in services, revival in rural demand, consumer and business optimism, the government’s thrust on capex, and healthy balance sheets of banks and corporates”. The risks to growth are expected to emanate from external factors. The factors that RBI has highlighted as risks to domestic growth are “headwinds from global factors like geopolitical tensions, volatile financial markets and energy prices, and climate shocks”. The domestic economy is projected to grow at 6.5% for 2023-24.

On Inflation:
The RBI’s near term outlook on inflation is fairly sanguine on the back of expectations of easing in vegetable prices and the effect of reduction in LPG prices. The headline CPI inflation is projected at 5.4% for 2023-24. The key risks to the projections, in RBI’s assessment, are “lower area sown under pulses, dip in reservoir levels, El Niño conditions and volatile global energy and food prices”. The RBI’s goal continues to be of achieving the 4% inflation target and thus policy mentions that even as a pause has been effected, the stance remains that of withdrawal of accommodation.

Going by the RBI’s evaluation of growth-inflation dynamics and the projections therein, we expect policy rates to be in status quo for a longer period. This view also takes into cognizance the evolving market expectations of higher-for-longer, with regards to the global interest rates.
The systemic liquidity condition coupled with the RBI’s stance of withdrawal of accommodation may prevent any meaningful easing at the shorter end of the yield curve. The longer end has reacted sharply to the announcement of possible OMO sales to manage liquidity. The yield on the benchmark 10yr g-sec has moved from 7.22% to 7.36% (at the time of writing). The longer end of the curve may continue to be volatile until some clarity emerges on the timing and quantum of OMO sales.

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