Making Sense

From the Post Policy RBI Conference, the most important remark came in the context of high Real Rates to which RBI Chief commented that Real Rates are not as high as being suggested. GDP over the last 3 years has gone up by an average of 8% which suggests potential GDP has moved higher. Real Rates should be seen in the context of potential GDP Growth.  A quick understanding of the concept demands an understanding of the natural rate of interest. The Natural  rate is generally defined as the level of the short-term real interest rate that would prevail in the absence of business cycle fluctuations, with output at potential, saving equating investment and stable inflation.  The natural rate is commonly thought to be determined by real forces that structurally affect the balance between actual and potential output, or equivalently between saving and investment.   RBI would undertake a study on Real Rates and Potential GDP after the release of this quarters GDP. The OIS ...

The Monetary Policy Decision :  Interest Decision               No change  6.25% - 6.50% - 6.75% (SDF - Repo - MSF).  Voting 5 / 6 in favor of no change Policy Stance           Withdrawal of Accommodation Liquidity management            No measures announced. Central Bank will continue to be  nimble in liquidity management Projections Projections were largely unchanged and though the March monthly bulletin had higher growth projections, the same was not revised in the monetary policy. 

  The MPC is scheduled to announce the interest rate decision on April 5, 2024 Expectations: Interest Decision             No change expected, 6.25% - 6.50% - 6.75% (SDF - Repo - MSF) Policy Stance          With FY25 Inflation estimates at 4.40% and RBI Policy Rate at 6.50%, RBI is well into restrictive territory with Real Rates on a Forward-Looking basis at over 2%. A whole new discussion around higher Neutral Rates has espoused as growth has consistently outpaced expectations.  PMIs have been in expansion territory and credit growth has been robust at an average 15.39% for the calendar 2023. Expectations into FY25 growth are robust with through the year growth seen at 7.40% and FY24 growth seen clocking 8%.  Outlook for inflation is benign with through the year inflation numbers likely in the vicinity of the lower band of the 4% - 6% target. According to RBI Monthly B...