Cautious RBI guides for key policy rates to stay higher for longer | Mint
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Business News/ Opinion / Columns/  Cautious RBI guides for key policy rates to stay higher for longer
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Cautious RBI guides for key policy rates to stay higher for longer

Growth projection for FY24 remains unchanged at 6.5%, as the RBI continues to expect that growth will be led by sustained buoyancy in services, revival in rural demand, consumer and business optimism, government’s thrust on capex, and healthy balance sheets of banks and corporates.

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The status quo on key policy rates maintained by the Monetary Policy Committee (MPC) was no surprise. The softening in agro commodity prices in recent weeks offered the MPC better breathing space in the near term. However, the RBI is emphatic in underscoring that it should not be misinterpreted as lowering of the central bank’s vigil against inflation. The governor reiterated that the RBI remains committed to achieve the headline CPI target of 4%, rather than merely bringing inflation within its tolerance band (i.e., 2-6%).

The central bank kept its CPI forecast for FY2023-24 unchanged at 5.4%. Interestingly, the RBI’s CPI forecast of 6.4% for Q2FY24 indicates that retail inflation can soften close to 5% in the September reading, thereby, softening by about 180 basis points from the previous monthly reading. The RBI is projecting retail inflation to soften to about 4.5% during FY25.

Growth projection for FY24 remains unchanged at 6.5%, as the RBI continues to expect that growth will be led by sustained buoyancy in services, revival in rural demand, consumer and business optimism, government’s thrust on capex, and healthy balance sheets of banks and corporates. Though domestic growth remains upbeat, weather-related shocks to crop output, global financial tightening alongwith domestic policy transmission mean that domestic growth trajectory warrants close monitoring over the subsequent quarters.

RBI has maintained that the financial sector balance sheet remains robust. However, the central bank raised red flags concerning the steep rise in unsecured personal loan growth as it continues to monitor the retail credit landscape in order to gauge early signs of strain. The latest RBI data shows that the personal loans segment grew at over 30% y/y.

As in the last policy meeting, the RBI has again explicitly highlighted that active management of surplus liquidity would be undertaken whenever required. This, along with the higher-for-longer policy rate narrative of the RBI, is expected to induce further policy transmission with respect to the current hiking cycle as the ongoing resilience of the domestic economy helps the cause for RBI to remain vigilant regarding the liquidity and inflation scenario.

The global macroeconomic backdrop continues to be complicated. Inflation and central bank policy rates seem to have peaked for most countries, while the pace of economic activities remains varied across economies. Macroeconomic data still point to a healthy economy, albeit a slowing one. On the other hand, macro-economic indicators in the Euro Area continue to decelerate sharply as indicated by falling consumer sentiment, weakening the manufacturing and services sector.

In its September policy, the US FOMC held interest rates steady but maintained a hawkish tone. They guided for another hike in the Fed Funds Rate during 2023 and fewer cuts next year than what was indicated earlier. More recent commentaries by Fed officials paint a blurry picture regarding terminal Fed funds rate, but the higher-for-longer rates seem to be the unanimous choice. US markets currently assign about a 35% chance of at least one more hike by the Fed during 2023.

Global financial markets remained jittery of late as reflected by rising VIX and the extraordinary spike in global yields over the last few weeks. The US 10-year yield has risen by more than 50 basis points since August to hit 16-year highs while 30-year yield briefly crossed the 5% mark for the first time since August 2007. On the other hand, the dollar has gained significant strength on the back of rising US treasury yields, faltering global growth outlook, supply-constrained rising oil prices, and the recent uncertainties around government funding stopgap for the US. RBI’s current indication of conducting OMOs has come at a time when there was nervousness in the domestic market about a spike in US bond yields. One feels that today’s jump in IGB yields partly reflects that nervousness.

Finally, to sum up, monetary policy in India in the recent past has been characterised by decisive and front-loaded action balancing long-term objectives and near-term priorities. The MPC rightly refrained from any knee-jerk reactions. The status quo on the policy rates by the MPC in October, albeit with abundant caution and a guidance of stronger vigil on inflation, was completely on expected lines and was a pragmatic choice. However, the central bank was emphatic in conveying its preparedness to act if the situation demands in the coming months along with continued vigil on managing market liquidity that will likely have a bearing on financial markets in the coming weeks.

Siddhartha Sanyal is chief economist and head of Research at Bandhan Bank. The author thanks Gaurav Mukherjee for his assistance. Views are personal.

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Published: 08 Oct 2023, 07:39 PM IST
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