Kotak Institutional Equities maintained its view of MPC’s prolonged pause and expected system liquidity to remain tight in the near term.
The October RBI MPC minutes highlighted members’ increased focus on returning inflation to the 4 per cent target. While noting that supply-side shocks remained transient, MPC members highlighted that the recurrence of these shocks increases generalization risks. Some members also stressed on the need to manage liquidity actively. Kotak Institutional Equities maintained its view of MPC’s prolonged pause and expected system liquidity to remain tight in the near term.
“The minutes of the October RBI MPC meeting brought out members’ concerns of recurring shocks, increasing the uncertainties in the inflation outlook. We see upside risks to the inflation trajectory, stemming from (1) rising crude oil prices and (2) weather-oriented disruptions. We do not see inflation durably settling near the 4 per cent target, at least in the next 12 months,” said Kotak Institutional Equities in its report.
“Accordingly, we retain our view of a prolonged pause by the RBI. Furthermore, we expect the RBI to keep liquidity conditions tight in the near term to provide a cushion from any adverse global event,” it said.
The RBI released the minutes of the Monetary Policy Committee (MPC) meeting on October 20, highlighting that India’s headline inflation is ruling above the tolerance band and its alignment with the target is getting interrupted. Hence, it added that the monetary policy needs to remain actively disinflationary. “Our fundamental goal is to align inflation with the 4% target and anchor inflation expectations,” RBI Governor Shaktikanta Das had said in the minutes released.
Growth concerns remain low
All members pointed to persistence of inflationary pressures from recurring supply shocks and noted that though the shocks were transitory, the intensity of the shocks had increased, increasing risks of inflation generalization, said Kotak Institutional Equities. The RBI Governor also highlighted that the recurring nature of these shocks further increases the risks of (1) possible loss of monetary policy credibility and (2) de-anchoring of inflation expectations. Also, MPC members noted that the small shortfall in monsoons was more likely to cause “a few short-lived inflation spikes rather than a sustained rise in inflation”.
On growth, all members expressed comfort noting the resilience exhibited so far, despite uneven growth globally. The RBI Governor also noted that the policy mix pursued during recent years fostered economic stability. Meanwhile, MPC member MD Patra highlighted that price stability had to remain the focus, as it could derail growth prospects by hurting the purchasing power.
RBI to actively manage liquidity
Some MPC members made reference to the need for active management of liquidity. Governor Shaktikanta Das noted that liquidity is expected to remain adequate in the coming months, amid an expected pick-up in government spending. However, this could be offset, in part, by CIC leakage. Ashima Goyal highlighted that fine-tuning liquidity was not yet adequate to keep the WACR near the repo rate. Ashima Goyal also noted that given varying shocks to short-term liquidity, durable liquidity would have to be adjusted (through tools such as OMOs) to offset the impact.
Source:financialexpress.com