RBI Policy Decision _ Why rock the boat when you're already sailing smoothly?

RBI's policy decision was largely on expected lines and couple of points that stood out to me from the policy document and the press conference are stated below:

1. Inflation is moderating but the pace of disinflation is uneven and slow and there is still a distance to cover to align headline inflation to target.

2. RBI is watchful of all incoming data from domestic as well as external sources and ready to deal with all emerging situations. However, the Governor noted caution in reading too much from a single month's employment number since Atlanta Fed GDPNow data is still trending at 2.9% and US has demonstrated growth resilience.

3. On the LCR , the draft circular is still under consideration. According to research reports, estimates are that draft guidelines on LCR if implemented could absorb liquidity in the ball park 5 Lac crore range.

4. On the decision to exclude newly issued 14Y and 30Y bonds from FAR securities, DG Patra explained in detail that it has been observed that the major part of the interest of FAR investors is in the 5-10 years segment; actually, it accounts for 90% of the total investment. The interest in the 30-year paper is just 2% of the total stock of 30-year (bonds) that has been issued. Total FPI holding under various routes, as a share of total outstanding papers, is only 4.8%. Including all existing securities issued, the total stock of available investments under FAR is around ₹41 trillion, of which the current foreign investment is only ₹2 trillion, adding that this reflects that there is “ample amount of space to go”.

Interest Decision

No change 6.25% - 6.50% - 6.75% (SDF - Repo - MSF). Dr. Ashima Goyal and Prof. Jayanth R. Varma voted to reduce the policy repo rate by 25 basis points.

Policy Stance

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

Liquidity management

No measures announced. Central Bank will continue to be nimble in liquidity management and will use an appropriate mix of instruments to modulate durable and frictional liquidity.

Projections

The inflation estimates for FY2025 were kept unchanged at 4.50% but were juggled a bit. Q1 estimates were significantly revised upwards by 60 bps and Q3 revised +10 bps and Q4 revised 20 bps lower. GDP estimates for full FY were unchanged at 7.20% with only Q1 seeing a modest revision of 20 bps on account of certain high frequency indicators. As RBIs policy document states, the results of 483 listed private manufacturing companies available so far indicate that their gross profits grew by a modest 4.7 per cent in Q1: 2024-25 as against 7.0 per cent in Q4:2023-24. Capital expenditure of central and state governments contracted by 35.0 per cent and 22.1 per cent, respectively, during Q1:2024-25. Revenue expenditure net of interest payments and subsidies of central and state governments contracted by 1.5 per cent and 0.2 per cent, respectively, during the quarter. Index of eight core industries expanded by 4.0 per cent year-on-year (y-o-y) in June 2024 compared to 6.4 per cent in May 2024.

Since I'm travelling to Delhi over the weekend, my Monday post on US round up will be posted on Tuesday.

Comments

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Summary of Levels

Crude Prices rallied further to $91 a barrel, levels not seen since Oct 2023, on escalating Geopolitical tensions in the Middle East following the Israeli attack on Iranian Embassy compound in Damascus and UAE's suspension of diplomatic coordination with Israel in the wake of the death of seven World Central Kitchen humanitarian workers in Gaza.

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