RBI SIGNALS RATES TO STAY ON HOLD AMID GROWTH BOOM
Towards the end of his media interaction after the monetary policy statement on Friday, RBI governor Shaktikanta Das was asked whether his statement that the central bank should be “mindful of the risk of overtightening” meant a shift towards a neutral stance in near future. The governor’s answer summed up the central bank’s stance: “It’s wrong to assume any kind of loosening is around the corner. It will not be correct to assume status quo as neutral stance.”
The governor made it clear that “inflation management cannot be on autopilot”. The near-term outlook, he said, is “masked by risks to food inflation”. The central bank projected consumer inflation at 5.4% for 2023-24, unchanged from its previous projection.
The six-member Monetary Policy Committee voted unanimously to keep the benchmark repurchase rate at 6.5% for the fifth straight time, in line with forecasts. All but one of the panel members voted to keep the policy stance at “withdrawal of accommodation”, indicating rates may remain higher for longer.
“We believe the RBI is firmly set on the course of policy pause for now,” Aurodeep Nandi, economist at Nomura Holdings, told Bloomberg. “But we predict 100 basis points of cumulative policy easing starting from August 2024 as inflation moderates and growth headwinds gather.”
The governor repeated that the RBI’s focus is on the medium-term inflation target of 4%, and the central bank has “some distance to cover” to achieve that.
The central bank expects the economy to expand at 7% in the current fiscal year from 6.5% after stronger than expected growth in the July-September quarter. “The Indian economy presents a picture of resilience and momentum,” Das said, surprising economists. At a press conference later in the day, RBI deputy governor Michael Patra called the upgraded GDP estimate of 7% “conservative”.
Patra pointed to high-frequency indicators in October and November that suggest growth remained strong this quarter. Das added that rural demand has rebounded, government capital spending has been strong and private investment is expected to pick up. As per the RBI’s projections, GDP is expected to grow 6.7% in the first quarter, 6.5% in second quarter and 6.4% in third quarter of next fiscal.
Das said the monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations.
The rate action so far is still working its way into the economy. The RBI has raised the repo rate by a total 250 basis points since May 2022 in its fight to tame high inflation. CPI inflation dropped to a four-month low of 4.87% in October, but is expected to remain above the RBI’s 4% target.
On the state of the economy, Das said the fundamentals remain strong with banks and corporates showing healthier balance sheets, fiscal consolidation remains on course and robust forex reserves provide cushion against external shocks. “The Indian economy presents a picture of resilience and momentum,” said Das.
On issue of liquidity management and Open Market Operations (OMO) sales, Das said the central bank will remain nimble on liquidity management and the option to sell bonds is still on table.
“We have not said that OMO sales are off the table. All we have said is that due to certain factors beyond our control, the need for OMO sales has not come up so far,” Das said. “The tool remains on the table and will be used, if and when required, depending on evolving liquidity conditions,” he said in a press conference.
In the previous meeting, the governor had announced the intention to conduct OMO sales but no auction was conducted so far due to liquidity deficit.
In a big relief to banks, the governor announced allowing reversal of liquidity facilities under both standing deposit facility (SDF) and marginal standing facility (MSF) even during weekends and holidays with effect from December 30, a move that will facilitate better fund management for lenders.
“The RBI policy announcement is a clear affirmation that the Indian economy is poised for a stable inflation and high growth regime with the possibility of growth breaching 7% for the third successive year,” said Dinesh Khara, chairman, SBI. “The measures regarding liquidity will facilitate better fund management by banks,” he added.
The central bank will come out with a unified regulatory framework on connected lending for all regulated entities to prevent compromise in loan pricing credit management, said the governor.
A K Goel, chairman, Indian Banks’ Association (IBA) and managing director & CEO, Punjab National Bank, said “higher growth projections of the economy are quite positive for the banking sector as it indicates increase in the level of economic activities and there by robust credit growth”.
Source:financialexpress.com