RBI MPC 08 Feb 2024 - What to Expect ?

The MPC is scheduled to announce the interest rate decision on Feb 8, 2024.

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) - Strength of the Domestic Economy gives RBI the latitude to be patient to assess evolving risks and retain the possibility of a further hike, hence no change in policy stance is expected.

Liquidity management

The system liquidity deficit reached a peak of 346K Crore on Jan 24. The O/N WACR was seen at 6.77%. The system liquidity has steadily improved and the WACR dropped to 6.29% on Feb 2, 2024. The reason being that market participants have taken up 250K crore through a 15 day Repo conducted by the RBI on Jan 25, 2024 and as liquidity conditions have progressively improved on month end Government spending, market participants are parking funds in SDF and the ON call rate is coming off. As of Feb 6, 2024, the liquidity deficit further improved to 101K crore. RBI has since announced 3 VRRR Auctions to anchor the lower bound of the overnight rate closer to the Repo Rate.

On the evolving outlook for liquidity, changes in durable liquidity arise from permanent or long term changes in the liabilities of the Reserve Bank , viz expansion / contraction in CiC and increase or decrease of reserves due to unsterilized Fx interventions. Durable liquidity has evolved around expected lines (refer article from previously)

I reckon no Liquidity measures will be announced at this point. According to the liquidity management framework, the banking liquidity being kept in deficit or surplus is a design feature of the liquidity management framework and build up of liquidity into a large deficit (greater than about 0.25% - 0.50% of NDTL) if expected to persist, should be offset through appropriate durable liquidity operations.

My base case is for no announcement on liquidity measures. If at all, what could the liquidity measures be?

Recent measures by RBI to anchor overnight rates suggest RBI would like to keep the policy anchored around the Repo Rate and hence OMO Purchases while a measure to address durable liquidity is also an yield signal and hence out of question given the global backdrop.

Like I mentioned in previous posts, in the previous 2 Election Years, INR appreciated and the impending JPM bond inclusion makes me constructive on USD flows. Hence, if RBI absorbs USDs, it is infusing rupee liquidity in the system and a further B/S Swaps is not required. Say, in case, we get a sharp sell off in US bonds and RBI has to conduct a Sell side USD intervention then RBI would be compelled to sterilize to provide sufficient INR liquidity to the markets and hence in that situation a B/S swap is likely.

Growth and Inflation projections

RBI is likely to revise the growth projections for Q3 and Q4 in line with the Ministry of Finance projections for GDP growth for full year at 7.30% while retaining the inflation projections for 2024. The window to cut rates opens in Q2 FY25. For Q3 , RBI estimates Inflation to trend at 4.70% and hence real rates will be at 180 bps. On the basis of the real rate argument, future interest rate action may be limited to 3 cuts.

Market is currently pricing in 55 bps of Rate cuts over the next 1 year.

The overall cost of credit is likely to come down on account of improved demand supply dynamics for Government Bonds (14.13 Lac cr Gross Market Borrowing) and new demand pool on account of JPM Bond Index Inclusion.

Would RBI give a signal to loosen financial condition at this point? Think not - with growth solid at 7.30%, Equity markets near all time highs, strong PMI numbers and Inflation closer to the upper range of the 4% - 6% target, it appears unlikely.

RBI is likely to be dictated by the evolving balance of risks emanating from global and domestic developments for future policy action.

Hence, expect a muted market reaction to policy decision.

Comments

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