BackRBI monetary policy: Will banks turmoil in West play a role in MPC's rate hike decision?
This April policy, RBI is expected to be split between taming inflation and ensuring no extraordinary shocks to Indian financial systems.
PremiumRBI which is an inflation trajectory central bank, is set to announce the first bi-monthly monetary policy of FY24 on Thursday. In line with global central banks, RBI began the rate hike cycle from May last year to tackle stubbornly high inflation. However, in the Western economies, especially, in the US and Europe, the banking system is the first to face the shocks of rising interest rates.
Banks in the West are struggling with a liquidity crunch which also resulted in the failure of two major US banks and also resorting to acquisitions and mergers. There have been concerns about the rate hike cycle being the cause of turmoil in the banks here.
Hence, this April policy, RBI is expected to be split between taming inflation and ensuring no extraordinary shocks to Indian financial systems.
Rohin Agarwal, Vice President at Avener Capital said that in the February meeting, most of the MPC members were worried about core inflation.
Since then, Agarwal added, domestic CPI inflation has remained elevated above 6% for the last two months. Additionally, the upside risks to food inflation exist due to unseasonal rains and in case there are El Nino led disruptions.
On the other hand, Agarwal also sheds some light on the banking crises in the West.
He added, "The banking crisis in the US and Europe and the slowing growth outlook might also be considered by some members of MPC while taking a stance on rate hike. There have been increasing concerns that rapid rate hikes by central banks have been a major driver for recent failures in small banks of the US and EU."
Taking into consideration the above, Agarwal believes that RBI RBI will have to balance its commitment towards taming inflation while ensuring that India's financial system is not exposed to extraordinary shocks.
"The expectation around Fed revisiting its aggressive stance on inflation will also be a consideration for RBI. Another 25-bps rate hike with a stance change to neutral looks like the most likely outcome. The market will also look for the RBI’s position on liquidity conditions," he added.
Avener Capital's VP believes that the banking system liquidity deficit is likely to increase during the April-June period. In absence of liquidity support from the RBI, the short-term rate can move higher meaningfully.
Since May last year, RBI has hiked the repo rate six times in a row -- taking the total hike to 250 bps. The repo rate has shifted from 4% to a four-year high of 6.50%.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
