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Status quo to continue? RBI may retain repo rates and focus on liquidity tightening; GDP aim may see uptick

The Reserve Bank of India’s rate-setting panel, Monetary Policy Committee (MPC), is likely to keep the repo rate unchanged at 6.5 per cent for the fifth consecutive time, shifting its focus on liquidity tightening, according to some economists.

RBI Governor Shaktikanta Das will announce MPC’s decision regarding the key interest rates, GDP and inflation forecast post the completion of the committee’s three day bi-monthly meeting at 10 am on December 8.

The chances of no hike in the key lending rates can be attributed to moderation of inflationary prints closer to RBI’s target of 2-6 per cent and a robust expansion of economic output in H1 led by upward surprise in Q2 GDP growth.

“With an upside surprise in Q2 GDP numbers along with high-frequency indicators like IIP, Core and PMI indicating strong growth early in Q3 means the Indian economy has and continues to outperform broad expectations,” said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.

An ET Poll of 10 economists showed that the RBI may be seen keeping the repo rate unchanged at 6.5 per cent while retaining its stance of withdrawal of accommodation.

After raising the repo rate by 250 basis points (2.5 percentage points) from May 2022 to February 2023, the committee has maintained a pause on the benchmark rate, which is the rate at which the RBI lends to banks.“We expect the RBI to maintain a status quo on rates and stance. We expect RBI to use liquidity tightening to speed transmission and use macro prudential measures to manage risks to financial stability,” said Dharmakirti Joshi, Chief Economist, CRISIL ltd.Focus on liquidity tightening

Experts are of the view that the RBI will keenly focus on liquidity tightening.

Throughout November, liquidity conditions predominantly remained in deficit due to which the focus will be on tightening, suggested a report by CareEdge.

“Looking forward, the RBI is likely to implement liquidity management operations as and when necessary to support money market conditions. While an overall tight liquidity situation is anticipated, the RBI aims to ensure that it does not unduly impede credit growth,” it said.

What lies on the inflation front?

The central bank may not be keen on revising the inflation projections for FY24. The softening of core (adjusted without fuel and food) inflation has been seen as the silver lining.

“They are likely to keep inflation forecasts unchanged,” said CRISIL’s Chief Economist Joshi.

The core inflation has maintained its down momentum, however, the challenging factor has been the food inflation that continues to cause worry.

“While prices of onions and tomatoes shooting up will keep headline CPI elevated in the coming months, lower reservoir levels will likely affect Rabi output next year,” said Hajra.

Deloitte’s Economist Rumki Majumdar also said that the upward pressure on food prices is likely to continue due to the weather impact.

“The economy is picking momentum so there will be demand pressure on inflation. Besides, the US Federal reserve is also likely to keep its policy stance hawkish. Furthermore, the recent impact of winter rain on the Rabi crop, coupled with lower crop production in the last quarter, is anticipated to constrain the supply side, thereby exerting upward pressure on food prices, keeping them elevated. All these factors contribute to the vigilant approach that RBI may take up,” she said.

India’s retail inflation had eased to a four-month low of 4.87 per cent in October, mainly due to cooling prices of food items.

The Reserve Bank’s MPC, in its October meeting, projected CPI inflation at 5.4 per cent for 2023-24, a moderation from 6.7 per cent in 2022-23.

GDP Projections

The surprising Q2 GDP growth, soaring 7.6 per cent, has set a positive tone for the overall economic outlook.

With manufacturing and construction sectors driving this growth, experts anticipate potential upward revisions in the GDP projections.

“Manufacturing sustained expansion, endorsed by IIP and core infra sector growth,” chief economic advisor V Anantha Nageswaran had said.

The core sector data also showed strong growth rising 12.1 per cent in October, giving further impetus to upward revisions.

The RBI expects India to grow 6.5 per cent in FY24. Earlier this week, S&P Global Ratings revised India’s economic growth forecast to 6.4 per cent, predicting robust domestic momentum.

The Q2 number is expected to provide some comfort to the RBI MPC. CRISIL suggested that the MPC might raise GDP growth projections in this meeting.

In its October meeting, the MPC had maintained the real GDP growth forecast for 2023-24 at 6.5 per cent with Q2 at 6.5 per cent; Q3 at 6.0 per cent; and Q4 at 5.7 per cent. Real GDP growth for Q1:2024-25 was projected at 6.6 per cent.

“Headwinds from geopolitical tensions and geoeconomic fragmentation, volatility in global financial markets, global economic slowdown, and uneven monsoon, however, pose risks to the outlook,” RBI Governor Das had said during his address post the meet.

It will be interesting to watch MPC’s action post the surprising Q2 numbers.


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