Banking Central | Don’t expect fireworks at the MPC meet outcome today

Not yet time to lower the guard on the inflation front.

It's going to be a non-event for those looking out for some action on the rate front when the RBI Governor announces the Monetary Policy Committee meeting outcome today.

Even as the Reserve Bank finds a snug corner draws comfort from the higher GDP growth number at 7.6 percent (July-September quarter) and a gradual moderation in the core inflation in recent months, it is not yet time to lower the guards. The price risks are persistent and can potentially upset the MPC’s rate course going ahead.

Inflation cools down

Let’s look at what happened on the inflation front in October. The widely tracked consumer price index (CPI) based retail inflation fell to 4.87 percent in October because of a mix of factors, including favourable base effect and lower prices of certain items. On a higher base last year, the growth in inflation numbers tends to appear lower this year.

There is some good news, though. The headline inflation remained within the Reserve Bank of India's tolerance range of 2-6 percent for the second

straight month. More importantly, core inflation (non-volatile part of the headline inflation) eased to 4.2 percent from 4.5 percent in September.

Yet, not all is well on the inflation front for the RBI. The retail inflation has now been above the medium-term target of 4 percent for 49 consecutive months.

Risks persist

There are persisting risks that may jack up inflation going ahead and it could manifest in food price escalation as an effect of the El Nino weather conditions. A potential resurgence in the food inflation could add pressure to the overall inflation numbers. Learning from its past mistakes, the MPC wouldn’t want to uncork the bubble early as lowering the guard at this point could erode the hard-earned gains over inflation.

The MPC has also hiked the policy repo rate by 250 basis points (bps) to 6.5 percent in 2022-23 to rein in inflation. One basis point is one-hundredth of a percentage point. Further rate hikes too soon could dent growth and kill the nascent recovery seen in the economy.

But, the RBI doesn’t need to always hike rates or cut to influence demand in the banking system. It has a verity of tools at hand with liquidity control being the key weapon. The RBI has been actively intervening the market with market operations (either by selling or buying bonds) to control liquidity and has kept the liquidity level tight to facilitate effective transmission of previous rate hikes. Yet, the rate transmission is yet to happen fully.

Liquidity moves

Instead of tinkering with the rates, the RBI may choose to keep the liquidity tight and prod lenders for effective transmission of the previous rate hikes in the banking system. Second, the central bank’s recent move to increase risk weight on consumer loans too would indirectly curb the demand for personal loans.

The short point here is that while the policy event is likely to be a non-event in terms of a rate change, one needs to watch out for the projections on growth and inflation.

At this point, it looks like the central bank will raise the annual growth forecast modestly, drawing comfort from the revival seen on ground. On the inflation-front, the central bank may continue to warn about uncertainty and leave the projection unchanged. With respect to the policy stance (withdrawal from accommodation), the MPC is likely to continue as a divided house. No surprises likely there as well.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.