The earlier article covered the MPC decision and since I had not covered the Minutes released on Oct 20th, I wanted to sum up the highlights as below:
1. Inflation
- Inflation spike seen in July and Aug as transitory
- Spatio-temporal dispersion in the rainfall could cause volatility in food prices
- Food inflation may not see sustained easing in Q3 but ample buffer stocks and supply side measures from the Govt likely to buttress the impact of rise in vegetable prices
- MPC draws comfort from deceleration in Core CPI
- Outlook uncertain
2. Growth Momentum to Sustain
- Decrease in Household net Financial Savings and an Increase in Financial liabilities support consumption
- Q3 to be buoyed by festival demand
- Private Sector investment is gaining pace
- Drag comes from the external sector
3. Real Rates are positive
4. Liquidity will be actively managed, incl OMO sales
We had seen a sharp sell off in bonds following the mention of OMO sales on Oct 6. The system liquidity continues to be in deficit and the recent sell off in bonds is seen more as a reaction to global bond sell off rather than anything else. The narrative from the minutes suggests that MPC members are assured about the domestic growth momentum and deceleration in Core inflation. The path of inflation is beset by uncertainty from food price and oil price shock. With real rates restrictive, MPC will be guided by evolving domestic fundamentals and global developments.
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