India's GDP growth rate of 7.6% for the July-September quarter surpassed the market expectations along with projections made by the Reserve Bank of India. However, strong GDP numbers are unlikely to deter RBI from its hawkish stance on the repo rate in December. RBI's Monetary Policy Committee (MPC) is likely to remain on a cautious hold and keep the repo rate unchanged at 6.5%, according to Barclays.
Apart from continuing its hawkish stance on the repo rate, the central bank may highlight risks to inflation from a potential recurrence of food price shocks and its impact on inflation expectations despite cooling core inflation, notes Barclays in its December MPC review.
With positive Q3 FY24 GDP print numbers, the RBI is expected to be less concerned over the growth momentum. The central bank may also raise its annual growth forecast modestly, but keep the inflation forecasts unchanged.
"The MPC is likely to flag a moderation in the pace of monetary transmission, as spreads of lending rates over the repo rate have narrowed in the past few months. Accordingly, we expect the committee to maintain the monetary policy stance pointed towards a "withdrawal of accommodation" despite deficit liquidity conditions," said Barclays in its report.
In its upcoming meeting, the RBI is likely to maintain its focus on liquidity management and credit growth. Barclays report underlined RBI's disinterest in tightening liquidity excessively in the present scenario.
“We think the bank will likely want to avoid a relapse of the WACR below/ around the repo rate due to excess liquidity conditions, which implies it will continue to conduct two-way operations as needed,” stated Barclays in its report.
Bank credit growth continues to be at elevated levels, mainly due to personal loans, which are growing around ~30% y/y. Governor Das had flagged this rapid growth in the October MPC meeting, advising banks and non-banking financial companies (NBFCs) to strengthen their internal surveillance mechanisms and address the build-up of risks.
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