RBI Monetary Policy Decision

The MPC is scheduled to announce the interest rate decision on Oct 6, 2023.

Expectations:

Interest Decision

No change expected, 6.25% - 6.50% - 6.75% (SDF - Repo - MSF)
Policy Stance

Withdrawal of Accommodation ( the monetary policy stance hinges on the direction of policy rates)

Liquidity management

After the liquidity tightness in September, Liquidity deficit continued to improve with LAF injection as on Oct 3 at 40K from Sep 29 at 100K. As the Government expenditure kicks in and amounts impounded under I-CRR are released, liquidity could slowly turn positive. The period starting Oct - Mar will see liquidity tightness on account of increased demand for currency. Diwali, Dussehra, 5 state elections, seasonal increase in demand on Rabi Harvest, marriage season and Hindu Festivals followed by general elections could see an estimated rise of 4% in CiC. However, the liquidity outlook is complex as index bond inclusion flows and FPI flows ahead of the general elections could see CB intervention which could smoothen out liquidity tightness.

I think no measures will likely be announced on the liquidity front. (I promise to write a more detailed article on liquidity later)

Projections

Inflation projections could be revised upwards while growth projections could be retained as domestic economic activity continues to be buoyant. Last policy projections have been summarized below:

Any material change in year end inflation projections could build in expectations of another hike by the Reserve Bank of India and assumptions on crude oil prices will be important to consider.

The domestic economic activity data has held up pretty well. The full year end inflation projections at 5.4% make the real rate positive. Even if RBI was to increase the Q4 inflation estimate, the next 2 quarters, esp the Q3 of the next calendar year will see an inflation drop on account of high base effects so in that sense a rate hike is not merited. Most of the Global Central Banks are at peak terminal rates. However, most Central Banks have kept the optionality of hiking further while being data dependent and RBI is also likely to maintain that same narrative.

We wait for the policy decision and the press conference to find further clues on policy guidance.

Comments

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