RBI monetary policy starts tomorrow. Here are risks that the central bank must keep in mind
RBI likely to maintain policy rate at 6.5% and keep liquidity tight as global and domestic risks increase, says Suvodeep Rakshit of Kotak Institutional Equities.
As the Reserve Bank of India (RBI) monetary policy committee (MPC) meets for the October policy, global and domestic risks have increased from the August policy. Domestic inflation has seen a spike up to 7.4% in July and subsequently fallen back to 6.8% in August and possibly move towards 5.5% by December. However, it remains well above the 4% target and will likely remain so for at least few more quarters. GDP growth remains quite stable without any near-term risks of dislocation even as the global slowdown risks remain. External sector risks have increased with crude oil prices increasing by more than 10% with continuing upside bias. Along with crude prices, dollar has been strong imparting a depreciation bias to the INR.
Major developed market (DM) central banks seem to be setting up for a long pause at elevated policy rates. With this backdrop and outlook, the RBI has very little space to sound dovish. The RBI will likely maintain policy rate at 6.5% while aiming to keep liquidity tight.
Brent crude oil price has moved to a range of $95-100 over past few days (with upside pressures likely to continue) from $85-90 during the August policy meeting. In the same period, the Dollar index (DXY) has strengthened to around 106 from 102 with the INR moving towards 83-83.5 range from 82.5-83 range. Inflation in the major DMs while coming off, remains much above their targets. DM central banks remain hawkish and has been signaling a higher-for-longer stance with the markets finally resigning to agree with them. This becomes more credible given that growth continues to be resilient.
From the RBI’s standpoint, India’s rate differential with the DMs has continued to narrow and will stabilize as the central banks pause. The current account and capital flows will be under a fair bit of pressure in the rest of FY2024. The RBI has always been vigilant of pressures on the external balance. The biggest shift since the August policy has been in the external balance. We expect this to be the bigger concern in the backdrop of the monetary policy setting.
Read all market stories here
India’s inflation trajectory has seen a bit of roller coaster ride with July CPI inflation print spiking up to 7.4% and then falling to 6.8% in August; all on the back of vegetable prices. The good part is that core inflation has been steadily coming off and should glide towards 4.5% in 3QFY24. However, the RBI will be mindful of few risks: (1) within food inflation the more persistent items such as cereals, pulses, prepared meals, etc. have remained elevated, (2) El Nino conditions can impact harvesting adversely leading to price spikes, and (3) raw material prices will likely see some upside which can have lagged impact on core inflation. Importantly, headline inflation is likely to remain well above the 4% target, at least, for the next few quarters.
With growth remaining steady, the RBI will prefer to stay watchful of the risks from external sector and inflation. Explicit action on rates will be weighed upon when inflation expectations get adversely impacted and second-round impact of non-core components start feeding into headline inflation. For now, given the external sector pressures and the domestic macro scenario, the RBI will prefer to implicitly act on rates through tight liquidity conditions. The October policy will likely reflect the same: concern on external sector pressures, cautiousness on domestic inflation, and being mindful of domestic growth. The MPC keeping repo rate at 6.5% with the stance retained at withdrawal of accommodation. The RBI will aim to keep external risks at bay by acting on liquidity and FX/bond market interventions.
The author, Suvodeep Rakshit is Senior Economist at Kotak Institutional Equities.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
Catch all the Business News , Economy news , Breaking News Events andLatest News Updates on Live Mint. Download TheMint News App to get Daily Market Updates.
Business NewsEconomyRBI monetary policy starts tomorrow. Here are risks that the central bank must keep in mind
First Published:3 Oct 2023, 05:30 PM IST
- Top Gainers
- Top Losers
- 52 Week High