Reserve Bank of India Governor Shaktikanta Das
Image: Punit Paranjpe / AFP
The Reserve Bank of India sprung no surprises when its six-member rate-setting panel announced the decision to keep the benchmark repo rate unchanged at 6.5 percent and five out of six members voted to continue with the monetary policy stance. The central bank did not tweak its inflation and growth forecasts.
“We have not increased the rates. Our focus is to bring down inflation, which will increase purchasing power. Growth continues to be resilient. Our policy is for 1.4 billion people. When inflation comes down, naturally the common man benefits the most,” Governor Das stated.
There was a note of caution too.
“The need of the hour is to remain vigilant and not give room to complacency. Lessons from the past one-and-a-half decades and from living through the global financial crisis and the taper tantrum tell us that risks and vulnerabilities can grow even in good times,” Das said.
After the sharp rise in vegetable prices pushed headline inflation outside of the Reserve Bank’s upper threshold of 6 percent, economists have been watchful of the inflationary trend over the past couple of months. In fact, in the August policy, the central bank had marginally raised its inflation forecast to 5.4 percent for FY24.
Governor Das expects near-term inflation to soften on the back of lower vegetable prices and the reduction in LPG prices. But he cautioned that the future trajectory will depend on a number of factors: “For kharif crops, the area sown under pulses is below the level a year ago. Kharif onion production needs to be watched closely. Demand supply mismatches in spices are likely to keep these prices at elevated levels. The inflation trajectory will also be shaped by El Niño conditions and global food and energy prices. Together with global financial market volatility, these factors pose risks to the outlook.”
On the growth front, the RBI is less worried. It pointed out that investment activity continued to maintain momentum with growth in urban consumption and signs of revival in rural demand. “Private sector capex is gaining ground as suggested by expansion in production and imports of capital goods and new projects sanctioned by banks. Services exports expanded at a healthy pace,” Governor Das explained. The RBI retained its GDP growth forecast at 6.5 percent for the current fiscal year.
The October policy is in line with Street expectations. At 1 pm, the S&P BSE Sensex was up by 0.49 percent to 65,950 points. However, there was nervousness on Mint Street. The 10-year bond yield was up by 1.94 percent to 7.354.
Besides credit policy announcements, the RBI governor said it could consider Open Market Sales (OMS) to drain out excess liquidity from the system. Murthy Nagarajan, head--fixed income, Tata Asset Management, says, “The market was not expecting this measure from RBI to suck out excess liquidity. Due to festival season, liquidity is expected to tighten due to cash withdrawal from the banking system. The ten year is trading at 7.30 percent levels and expected to now trade in the band of 7.20 to 7.30 percent in the coming months.” Also read: Risk to the inflation outlook stems from the liquidity overhang in the banking system: RBI
Governor Das refrained from forward guidance on rates. But he did reiterate that the central bank is on the front foot and vigilant of the evolving inflation dynamics to ensure financial stability and anchor inflation expectations.
“I would like to emphatically reiterate that our inflation target is 4 percent and not 2 to 6 percent. Our aim is to align inflation to the target on a durable basis, while supporting growth. This would keep inflation risk premium low and improve our competitiveness, productivity and growth potential,” Das said.
Most analysts, economists, and money managers say measures to manage liquidity via OMS coupled with the inflation target of 4 percent suggest that the RBI is unlikely to relent on rates this year.
“It is clear, to our mind, that the RBI will not let financial conditions loose anytime soon,” Motilal Oswal’s chief economist Nikhil Gupta says. Prasenjit Basu, chief economist, ICICI Securities believes the next policy move to be a rate cut in Q1FY25.
“RBI is expected to maintain the status quo on rates for longer and possibly consider rate cuts in H1FY25. All eyes will now be on the earnings season. Banks that have released their provisional numbers so far have sustained strong credit growth momentum. However, concerns around the quantum of margin compression continue to linger. Banks will continue to face headwinds on margins in this quarter as well, with some negative impact on NIMs owing to ICRR visible only during this quarter,” Naveen Kulkarni, chief investment officer, Axis Securities PMS said. Also read: If price shocks persist, we have to act: RBI
Nilesh Shah, managing director, Kotak Mahindra Asset Management Company says, “The RBI governor mentioned that the pitch is turning and we will play the ball on merit. Today’s policy is like Kapil Dev Policy. It will manage liquidity, inflation, growth, rupee and financial sector stability in an appropriate equilibrium like legendary all-rounder Kapil Dev managed bowling, batting, fielding and captainship. The RBI has worked hard to create a balance between growth and inflation setting an example for the rest of the world. This policy continues to take that hard work forward.”
As Governor Das unveiled the bi-monthly monetary policy outcome on Friday he highlighted India’s rising clout on the global stage.
“India is poised to become the new growth engine of the world,” Das said. “The policy mix that we have pursued during the recent years of multiple and unparalleled shocks has fostered macroeconomic and financial stability. The external sector also remains eminently manageable.”