Making Sense

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...

Rate Decision      RBI policy mentioned the use of OMO sales which is a more durable liquidity absorbing measure and the catalyst for a policy pivot comes from a durable decline in inflation to near about 4% Policy Rate                               Unchanged Stance of Monetary Policy Withdrawal of Accommodation ( 5 - 1) Growth Projections                     Unchanged (2024 FY 6.50%, Q1 25 6.60%) Inflation Projections           Unchanged (2024 FY 5.40%, Q1 25 5.20%) Liquidity                                    May have to consider OMO sales Key takeaways from the earlier meeting 1. Inflation target is 4% and a Pivot in policy from tightening to accommodative will not happen ...

 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 ...

"Accuracy of Observation is the equivalent of accuracy of Thinking" I wrote about the expectations from the MPC yesterday and as expected RBI hiked repo rate by 25 bps to 6.50%. Consequently, SDF rate now stands at 6.25% and MSF rate at 6.75%. MPC voted 4 - 2 for change in policy rate.  On the change in monetary policy stance, MPC voted 4 - 2 to maintain monetary policy stance " withdrawal of accommodation" Key Highlights from the MPC Rate decision 1. Global growth prospects have improved 2. Domestic growth is likely to be supported by higher Rabi acreage, sustained urban demand, improving rural demand, robust credit expansion, gains in consumer and business optimism and the government’s enhanced thrust on capital expenditure and infrastructure in the Union Budget 2023-24 3. While RBI acknowledged the continuing downward momentum in inflation in FY 24, it estimated inflation to rule above 4% (RBI has an inflation target of 4% +/- 2%) and domestic economic growth to...

"There is nothing so fatal to character as half finished tasks" - David Lloyd George RBI released minutes of the MPC The minutes of Dec 5 - 7 MPC meeting were released. Please refer to the earlier posts  MPC Dec 7  and  Nov Inflation  blog post. RBI had raised policy repo rate by 35 bps to 6.25%. The SDF - MSF corridor stands at 6% - 6.5%. The broad narrative rests around downside risks to global growth and the drag from net exports; resilience of domestic growth; stickiness of inflation on partial pass through of higher input cost price pressures seen earlier. While the members agree on a lower trajectory of inflation, some members expressed their concerns on the lagged effect of monetary policy and that a wait and watch stance will be more appropriate other expressed concerns on inflation expectations becoming unhinged. Jayant Verma was a lone dove who dissented to the repo rate hike and status quo on stance (withdrawal of accommodation) while Ashima Goyal dissente...