RBI’s December policy review: Status quo to continue

With economic growth continuing to be strong, the central bank will focus mainly on inflation, liquidity, and currency management. Given the global economic trends and geopolitical situation, expect RBI to keep its key rates and stance unchanged.

Given the likely status quo, the market will instead closely track the narrative from RBI’s monetary policy committee (MPC) for direction on rates and liquidity over the next few quarters. Expect the central bank to continue with the same narrative—inflation targeting at 4%, ensuring price stability, keeping a close watch on global trends, and providing sufficient liquidity to support growth.

In the United States, inflation has been showing signs of easing, resulting in lower market yields. Signals from the US Federal Reserve indicate its rate cycle will likely remain steady; the market is expecting a rate cut in mid-2024. In short, there seems to be a softness as far as interest rates and the macros are concerned in the US.

Globally, while China and Europe are still grappling with relatively slowing growth, emerging economies are faring better. Geopolitical tensions, however, remain with the ongoing conflict between Israel and Hamas, and the economic uncertainty in China.

And though crude prices have remained stable to soft, we will have to continuously monitor the scenario to see how it would collectively impact India. At the moment, the outlook is far more balanced than it was during the previous few policy meetings.

In India, the economy has shown resilience and strength with Q2 GDP print coming at 7.6%. While urban consumption is holding steady, rural consumption is still weak and muted. Investment and capex-led growth has shown green shoots, boosted by government spending, infrastructure investments, and some capacity building. GST collections, too, have shown strong trends, and fiscal deficit seems to be in line with the Budget estimates.

Given all these, it is likely that RBI will raise its growth estimate.

The rupee has seen some depreciation, but is still relatively steady as compared with currencies of other emerging markets. Price stability is an important factor, and the central bank will be focused on maintaining it.

In the previous quarter, investors continued to invest into India, which is structurally attractive from a medium perspective. In the March-August period, foreign portfolio investors had infused Rs1,68,179 crore into Indian equities, as per official data. Though the trend was reversed in the September-October period due to various global issues, the buying so far in November and early December is encouraging.

FPIs have also invested in Indian debt market securities, putting in Rs36,300 crore so far this year—the first time in four years when FPIs became net buyers of Indian debt. Investors will be keenly watching India’s general election outcome in 2024.

Macros continue to hold steady. Consumer inflation was at a four-month low of 4.87% in October. That, strong Q2 GDP growth, and robust uptick in manufacturing and investments, point to growth with stability, providing considerable comfort to the central bank.

On the flip side, although consumer price index (CPI) inflation has dropped below 5%, it remains well above RBI’s stated target and may move upwards again for the November-December period. Vegetable prices have corrected significantly, as expected, but pulses and products are showing elevated momentum on wider shortages. Also, we need more data cues regarding the kharif sowing and output to gauge a possible shortage in key food inputs in the latter half of the fiscal year.

The El Nino factor also casts a shadow over the calculations. The government has already stepped in with bans on exports of certain staples and permits on some to be imported. But benign Q2 inflation data will go a long way in achieving the FY24 annual inflation outlook of 5.4%, giving RBI more room to wait for previous rate hikes to fully percolate into the economy.

Similarly, in the GDP numbers, agriculture at 1.2% is at its lowest growth since FY19, and trade, at 4.3%, is at the lowest since FY21. A vibrant topline seems to be masking this slow growth down the line. Therefore, it is imperative for RBI to maintain a proactive stand to facilitate a broader recovery.

In terms of overall liquidity, the tightness persists, eliminating the need for any rate revision; in fact, liquidity deficit reached the highest level (since December 2018) in late November, avoiding the need for more open market operations. Official data pegs the liquidity deficit in the banking system at a peak of Rs1.74 lakh crore, following monthly GST payments and weekly bond auctions.

One may expect this to fluctuate to up to Rs2 lakh crore progressively. It is generally perceived that RBI needs a minimal or even a deficit in its efforts to contain inflation. But the expected inflows through bond redemption and the government’s accelerated capital spending in the days ahead could bring liquidity pressures back.

Given all these, from a policy perspective, the factors outlined above warrant stability, which means, the central bank will likely maintain its rates and policy stance. It will continue to keep a close eye, especially, for any volatility from the global markets through commodities and currency flows. RBI will continue to emphasise its target of 4% inflation but it would be a wait-and-watch narrative with no change in the stance.

Shanti Ekambaram is a whole-time director at Kotak Mahindra Bank Ltd