RBI MPC Meet Highlights: Policy rates kept unchanged, inflation target at 4%; Governor says liquidity to be actively managed

The live blog session has concluded. For more news, views and updates, stay tuned with Moneycontrol.com

Indranil Pan, Chief Economist, YES BANK also adds that for now, it seems to be eluding as the RBI themselves have forecasted inflation for the year at 5.4%, with even the Q1 of the next financial year being higher at 5.2%. "Given that excess liquidity could be inflationary and can pose risks to financial stability, the RBI has started deploying policy tools from the August policy to remove the excess liquidity from the system. Unexpected by all, the RBI announces that OMO sales also becomes a policy tool for the future in its efforts to suck out liquidity. This is important even from a longer perspective, given that India could be expecting large FX flows in FY25 on the back of JPM bond index inclusion,” Pan adds.

Indranil Pan, Chief Economist, YES BANK says, “This policy was on expected lines with no change in the policy rate as also the stance. Even as food inflation and core inflation had been moderating, the RBI rightly desisted from providing any dovish bent to the policy communication. On the other hand, the future guidance was laced with adequate cautionary notes on the inflation trajectory and the risks to the same coming from uncertainties over the kharif output, lower reservoir levels and volatile global crude and commodity prices. And there is a clear reverberation of the previous policy – that the RBI will only be happy if they are able to hit the 4% mark on inflation on a durable basis."

Achala Jethmalani, Economist at RBL Bank views RBI's stance as a ‘hawkish hold’ on policy rates as the focus remains on bringing inflation down to the 4.0% target. "The RBI’s comments on existing banking system liquidity is indicative of tighter system liquidity conditions continuing as it stands ready to deploy all its tools to absorb excess system liquidity. Brace for a long pause on the Repo Rate with tighter liquidity conditions. This is expected to complete the policy transmission in this hiking cycle with the objective of keeping borrowing costs high. The resilience in economic growth despite the restrictive financial conditions underpin the RBI’s move to tighten the liquidity conditions," says Jethmalani.

Radhika Rao, Senior Economist of DBS Bank says, "Despite a pause, the RBI MPC’s hawkish language suggests that price stability is questionable, and domestic financial conditions will remain tight. Policymakers are also mindful of the tight external financial conditions and narrowing (India-US) rate differentials, notwithstanding the comfortable reserves cushion and impending foreign bond inflows. Post-decision, Indian government bonds were under a cloud, as OMOs could be tapped for liquidity management."

“The RBI’s decision to pause along with retaining the withdrawal of accommodation stance was in line with expectations. Importantly, the RBI has explicitly highlighted the need to use OMO sales to modulate liquidity. This will weigh down bond markets’ sentiments. Concerns on food inflation were highlighted which can impart upside to headline inflation. We believe that inflation risks remain on the upside given weather related impact as well as commodity prices. Global monetary conditions will also weigh on RBI’s policy decisions. The good part is that growth remains resilient and core inflation remains under check. We maintain our call for a prolonged pause on repo rate at 6.5% well into FY2025 while liquidity over the medium term will be aimed at being close to neutral," says Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.

After the Reserve Bank of India (RBI) indicated they may consider Open Market Operations sales to manage liquidity, the yield on India's benchmark 10-year government bond rose 8 basis points (Bps). The decision was made during the RBI's bi-monthly Monetary Policy meeting.

On 10:50 AM, the yield on the benchmark 7.18 percent 2033 bond was 7.2890 percent, down from 7.2140 percent close the previous day. Read here

RBI Deputy Governor Michael Patra says, "MPC has said that they are focused on aligning inflation outcomes with the target. So a tendency of the inflation numbers to move towards 4 percent is what we are looking for. If it goes below 4 percent on a durable basis, then we will shift to accommodation."

Debopam Chaudhuri, Chief Economist, Piramal Group says, "RBI has been maintaining the policy rate at 6.5% for 8 months now. The longest transitory period in repo rate’s history, when it was kept on pause prior to a cut, was 12 months, in 2014. This was followed by a 25-basis-point cut in an out of schedule meeting in January 2015. A similar event cannot be ruled out this time, especially if the impact of food prices from lower kharif acreage does not impact RBI’s forecast for overall inflation during the rest of FY24."

RBI Deputy Governor Michael Patra: The historical average for net financial savings of households is about 7.5 percent of GDP. During the pandemic, people couldn’t spend and they built up precautionary savings and this figure rose to 11 percent of GDP. This has come down since. But absolute level of savings has increased by 14 percent. The higher financial liabilities of households is mostly going to housing.

Abheek Barua, Chief Economist, of HDFC Bank expected the RBI to deliver a status quo policy, keeping both its stance and policy rate unchanged. He says that the central bank also kept its growth and inflation forecast unchanged for FY24 continuing to sound cautious on inflationary risks.

"Given the pulls and pressures on liquidity conditions in the coming months, the RBI did not announce any durable liquidity absorption measures for now (like CRR hike) in line with our expectations. However, signalled that if required, they are open to the option of conducting OMO sales to manage liquidity conditions. This signals the RBI’s preference for tighter liquidity conditions going forward driven both by inflation risks and financial stability concerns as liquidity tightens globally. This also aligns with the central bank’s reiteration that they want to anchor inflation at 4% and keeping it below the upper band of the target range (at 6%) is not enough," he said.

The Reserve Bank of India (RBI) proposed a new facility called Card-on-File Tokenisation (CoFT) on October 6, which enables the creation of tokens for card data directly at the issuer bank level. This move was made in response to the growing acceptance and advantages of tokenisation of card data. In a statement, RBI Governor Shaktikanta Das stated that the introduction of CoFT creation facilities at the issuer bank level would be a positive step towards better data security.

What is CoFT, read in detail here.

Rajani Sinha, Chief Economist, CareEdge feels that the policy had a hawkish undertone to it. "The governor sounded cautious about inflation even though the full-year inflation projection was unchanged. It is to be noted that the governor reiterated the RBI’s commitment to bring CPI inflation down to 4% target. The RBI kept the GDP growth projection for FY24 untouched as they await additional data points to comprehensively assess the evolving dynamics," she says.

Sinha adds that the RBI remains watchful of the liquidity conditions and wants to ensure no build-up of surplus liquidity. "Hence the governor announced that RBI would consider open market operation (OMO) sale of government securities to mop up excess liquidity as required. We expect the RBI to start its rate-cutting journey from the second quarter of next fiscal year as inflation edges closer to 4% target," said Sinha.

RBI Governor Shaktikanta Das says, "It is not for me to comment on the government’s spending. It has a fiscal consolidation path that was announced in the Budget. There was some fiscal expansion due to the pandemic, but it was calibrated and measured. As for the fiscal consolidation path, the government has said it remains committed to it. So, as far as the central government’s finances are concerned, I do not see any major problems that worry the RBI."

RBI Deputy Governor M Rajeshwar Rao says cancellation of licences of urban co-operative banks is never a sudden development. "It is only when measures to improve their health and rehabilitate them do not work is their licence cancelled," he adds.

RBI kept policy rates and stance unchanged in line with market expectations. Given elevated global uncertainties & volatile inflation readings, they communicated to remain nimble and alert to emerging risks to ensure price stability. We continue to believe policy rates are likely to be on hold for an extended period due to resilient growth & uncertain global outlook," says Kaustubh Gupta, Co-Head Fixed Income, Aditya Birla Sun Life AMC Limited.

Kaushik Mehta, Founder & CEO of RUloans Distribution believes that the recent RBI decision to maintain the repo rate at 6.50%, with a 'withdrawal of accommodation' stance, brings promise for new home loan borrowers and others. Stable interest rates instil confidence, reducing the urgency for loan refinancing, he says.

"As the festive season approaches, this stable rate environment will impact personal and consumer loans, including those for festive shopping. Consumers are likely to leverage favorable lending conditions. Stable rates may also boost demand for homes and vehicles during this festive period, fueling economic growth," says Mehta.

"Moreover, the stable rate environment is expected to stimulate demand for business loans and Loan Against Property (LAP). Businesses needing working capital and anticipating manufacturing growth are likely to find this lending atmosphere favorable. This stability sets the stage for robust lending growth in the crucial last two quarters of the financial year, benefiting financial institutions and borrowers alike, and supporting economic stability and growth," he adds.

Inclusion of African Union in G20 is a very welcome development. G20 is a multilateral forum and an entire continent – except South Africa – can’t be left out of it. Africa now gets a voice in the G20 forum to express their priorities and expectations.

RBI Deputy Governor Michael Patra says that the liquidity management framework is robust. "The incremental CRR was to deal with the liquidity situation created by the withdrawal of Rs 2,000 notes… The average call money rate for the month is 6.56 percent, which is near the repo rate," Patra said.

RBI Governor Shaktikanta Das says OMO sales will be done through auctions and not via NDS-OM platform. So we will notify the auction. "Our liquidity management has nothing to do with bond yields going up in advanced economies," he adds.

The RBI had overlooked data in the early aftermath of COVID since the aim was to stimulate the economy & engineer a turn-around. Since changing its stance last year, the RBI has been data driven, says Shantanu Bhargava, MD, Head of Discretionary Investment Services, Waterfield Advisors. He adds, "According to the RBI's inflation prediction for Q3 & this FY, today's policy outcome is not surprising. We expect the RBI to retain the status quo unless we see a durable drop in inflation and if steady economic activity continues."

RBI Governor Shaktikanta Das says that the repo rate hikes have not fully translated into either deposit or lending rates of banks. "Liquidity is not in deficit. It went into deficit in the last 2-3 weeks due to scheduled GST, and advance tax payments. But overall, liquidity is surplus," he says, adding that Government spending has picked up and will pick up. That will add further liquidity to the system.

RBI Governor Shaktikanta Das sasy, "Warning about OMO sales has nothing to do with India’s global bond index inclusion. It is to do with domestic situation. At the moment, we do not propose to have a calendar for OMO sales."

As per the announcement made by RBI Governor Shaktikanta Das on October 6, a framework for the recognition of Self-Regulatory Organizations (SROs) for regulated entities (REs) is in the works. The SROs are expected to enhance compliance culture amongst their members and provide a consultative platform with the Reserve Bank for policy making, as stated by Das.

Read here

Aurodeep Nandi, India Economist, Nomura says, "There is an element of déjà vu to the RBI’s monetary policy – both, the policy rate and the policy stance of ‘withdrawal of accommodation’ were retained, as were the 2023-24 GDP growth and inflation forecasts, while markets were reminded that the RBI remains alert to act on upside inflation risks and that the 4% inflation target is sacred.

In contrast to the policy meeting in August, when vegetable-driven elevated inflation was the biggest near-term threat, the policy trade-offs have softened for the RBI, with growth remaining resilient, easing core inflation and headline inflation set to settle below the upper tolerance bound of 6% in September. That said, global and domestic uncertainties dictate that the RBI remains nimble and alert to the risk of higher inflation.

The RBI also flagged that liquidity remains too skewed and as in the previous policy meeting, the leash on liquidity remains tight, with the RBI stating that it may consider OMO sales. Overall, this is a hawkish pause – replayed."

The Monetary Policy Committee (MPC) and the Governor of the Reserve Bank of India, Shaktikanta Das, announced that urban cooperative banks can now offer gold loans under the bullet payment scheme up to Rs 4 lakh, which is twice the previous limit of Rs 2 lakh. Small and marginal borrowers will benefit from this decision, but it is important to note that this applies only to banks that have met the overall target and sub-targets under the Priority Sector Lending (PSL) as of March 31, 2023.

Read here

In a surprise move, the Reserve Bank of India (RBI) on October 6 made no change to its inflation forecast of 5.4 percent for 2023-24, although it made minor tweaks to the projections for the second and third quarters.

Interestingly, the latest forecast implies that headline retail inflation may crash to 4.9 percent in September. Here's the quarterly break-up of the inflation forecast

Pralay Mondal, MD & CEO, CSB Bank says, “The Status quo considering the volatility in Global factors is a prudent call. The growth projection of 6.6% along with incremental higher credit growth will keep pressure on banks for deposits. We hope a prudent balance in OMO sales will keep the system liquidity adequate to keep the short-term rates down. Overall close watch on inflation and other high-frequency data will remain important.”

Rohit Arora, CEO and Co-founder, Biz2Credit and Biz2X says, "RBI's decision to hold the repo rate steady at 6.5% showcases a strategic and balanced approach to India's economic trajectory. For fintech companies like ours, this not only provides a predictable environment but also signals a conducive atmosphere for sustained growth. It's a clear indication that the regulators are in sync with market dynamics, paving the way for Fintechs in India to innovate, expand, and contribute more significantly to the nation's financial inclusivity."

Steady interest rates with no change in stance were widely expected and par for the course. Despite the second quarter bulge in inflation, the RBI kept its inflation forecast for the current fiscal unchanged at 5.4%, says Dharmakirti Joshi, Chief Economist, CRISIL.

Further, the incomplete transmission of past 250 basis-points rate hikes to bank lending and deposit rates reinforced MPC’s imperative to continue its stance of withdrawal of accommodation. Noting resilient economic conditions, the MPC kept its GDP forecast unchanged at 6.5% this fiscal.

Food inflation remains a key monitorable not only because it is in double digits, but also because sub-normal monsoon and muted sowing can impact kharif output and prices. Additionally, low reservoir levels do not augur well for the rabi crops.

Crude oil has seen a lot of volatility of late and there is a reason to be cautious on that front — more due to geopolitical factors than demand, which is slowing and unlikely to drive crude prices up.

The tightening of US bond yields, capital outflows and strengthening of the dollar also tilt the balance in favour of the ‘withdrawal of accommodation’ stance. We expect rates to remain at these levels and foresee a rate cut only in the first quarter of next fiscal.

>> CPI inflation to average 4.5 percent in 2024-25
>> GDP growth to remain stable at 6.5 percent in 2024-25

the Reserve Bank of India's Governor, Shaktikanta Das, announced on October 6 that the central bank is considering using open market operations (OMO) sales to manage liquidity in line with the monetary policy stance. OMO refers to the central bank's purchase or sale of government securities in the open market. The timing and magnitude of such an operation will depend on the liquidity situation as it evolves, according to Das. Read in detail, here

The Reserve Bank of India's monetary policy committee (MPC) has maintained a lending repo rate of 6.5 percent for the fourth consecutive time, in line with its focus on controlling inflation. During the announcement, Governor Shaktikanta Das reaffirmed the RBI's policy stance of "withdrawal of accommodation", which aims to align inflation with the MPC's target while still supporting economic growth. Here are the takeaways from the policy announced today.

The Indian economy is forging ahead in a challenging global environment, drawing strength from its underlying macroeconomic fundamentals and buffers. While growth remain on track, the declining trend in inflation was interrupted in July and August. Volatile food and energy prices in the wake of lingering geopolitical tensions and adverse weather conditions render uncertainty to the inflation outlook. We remain vigilant of the evolving inflation dynamics, said RBI guv

Shaktikanta das said the central bank's aim is to align inflation to the target on a durable basis while supporting growth.

RBI has proposed card-on-file tokenization creation facility directly at the issue bank level. This will enhance convenience for card-holders.

NBFCs in middle and base layers can also use credit risk mitigation instruments to reduce their counterparty exposure under credit concentration norms.

With a view to strengthen project finance framework, the existing prudential norms have been reviewed. Detailed draft guidelines will soon be released for comments, said Guv Das.

RBI may consider OMO sales of government securities to manage liquidity consistent with the stance of monetary policy. The timing and quantum of such operations will depend on prevailing liquidity conditions.

RBI Governor Shaktikanta Das said moderation in system liquidity has led to greater recourse of MSF by banks. There is also skewed liquidity distribution among banks. It is a turning pitch and we will play our shots accordingly.

Guv Shaktikanta Das said appropriate and timely action is needed to prevent any spillovers from food and fuel price shocks. These are non-negotiable necessities.

All the signals from the policy statement indicate that a rate cut is not in the vicinity anytime soon as the MPC is unlikely to lower the guard on the inflation front in the near future. A hawkish policy statement is logical considering that inflation continues to be the key villain in the India growth story. Between the August policy review and now, nothing much has changed on the inflation front. MPC is clearly on an inflation fighting mode
-- Dinesh Unnikrishnan, Editor, Banking & Finance

Das said significant easing of inflation is expected in September. But indications are that throughout October-December 2023, food inflation may not see sustained easing. This requires careful monitoring incoming data and the outlook.

-- CPI inflation forecast for July-September 2023 raised to 6.4 percent from 6.2 percent
-- CPI inflation forecast for October-December 2023 cut to 5.6 percent from 5.7 percent
-- CPI inflation forecast for January-March 2024 left unchanged at 5.2 percent
-- CPI inflation forecast for April-June 2024 left unchanged at 5.2 percent

-- Core inflation eased by around 140 basis points from its recent peak in January. Further reduction is key to price stability.
-- RBI Governor Shaktikanta Das: The future inflation trajectory will depend on many factors, although in the near term it may come down.

- GDP growth forecast for July-September 2023 left unchanged at 6.5 percent
-- GDP growth forecast for October-December 2023 left unchanged at 6.0 percent
-- GDP growth forecast for January-March 2024 left unchanged at 5.7 percent
-- CPI inflation forecast for April-June 2024 left unchanged at 6.6 percent

-- Global headline inflation is easing but rules above the target of many major economies. -- Sovereign bond yields have firmed up, US dollar has appreciated, and equity markets have corrected.
-- Momentum in domestic agricultural activity in the second quarter has been maintained although monsoon was somewhat uneven.

-- Economic activity has remained resilient.
-- Transmission of 250 basis points increase in repo rate is still incomplete
-- MPC voted to remain focused on withdrawal of accommodation by 5 votes to 1
-- Standing Deposit Facility and Marginal Standing Facility rates also left unchanged at 6.25 percent and 6.75 percent

RBI Governor Shaktikanta Das said twin balance sheet stress of a decade ago has now been replaced by a twin balance sheet advantage.

The drawdown in the cash reserve ratio was being offset by advance tax and GST outflows, higher currency demand, delays in spending and intervention efforts, and keeping cash conditions tight, says Radhika Rao of DBS Bank.

The government's policies and capital spending have certainly fuelled infrastructure growth. There are a lot of opportunities for the manufacturing sector, which means the private sector would have to incur capital expenditure. For that, the interest rate regime would continue to play a very important role, says Umesh Chowdhury Vice-Chairman and MD of Titagarh Rail Systems

I think that between the last MPC meeting in August and this time, inflation has gone up, growth remains strong while global factors have turned a little adverse in the sense that the US Federal Reserve is still aggressive in its stance, which has led to hardening of yields, says Crisil Chief Economist D Joshi

We expect the MPC to keep the repo rate unchanged at 6.5%, keeping in mind waning core inflation, steady economic activity, and risks from supply-related price shocks, says Rahul Bajoria, chief economist at Barclays.

A status quo will mean nothing much for the end-consumer as banks have already factored in such a move. Lending and borrowing rates are unlikely to change immediately. But some banks, particularly large ones, could tweak the deposit rates downward as banking system liquidity eases. For equity and bond markets too, a status quo will be largely a non-event. Unless the RBI surprises with big measures on rates or liquidity, markets are unlikely to sway big on either side.
-- Dinesh Unnikrishnan, Editor, Banking & Finance

The big headache for the MPC is the real source of the current inflation spike and how effective are interest rates to counter that. It’s widely admitted that the current wave of high inflation is mostly due to the supply-side constraints and not a demand-led inflation. Hiking interest rates can only curb public demand. The hard truth is that the rate-setters have only limited tools to act against a supply-driven inflation. The ball is in the Government’s court to ease the supply bottlenecks and find ways to ramp up production. In the previous policy reviews, some policymakers have flagged this point in their statements. Will we see a repeat of the caution today? Let’s wait and watch!
-- Dinesh Unnikrishnan, Editor, Banking & Finance

Private and public sector banks are unlikely to change their lending and deposit rates any time soon as many lenders have revised their rates over the past few weeks, leaving little headroom for further changes in the near future.

A hawkish policy statement is nearly certain from the RBI today. That’s because inflation continues to be the key villain in the story. Between the August policy review and now, nothing much has changed on the inflation front. In fact, two consecutive months of CPI inflation above the 6% upperband should worry Das’ inflation warriors. The higher-for-longer narrative from the US Fed is a cue for MPC that will shape its thinking ahead. In layman’s language, interest rates in India are likely to stay where they are for a while. Yet, abundant caution on the inflation dangers will be communicated clearly -- Dinesh Unnikrishnan, Editor, Banking & Finance

-- Repo rate retained at 6.5 per cent
-- Focus on withdrawal of accommodative policy stance to ensure inflation aligns with target
-- GDP projection for FY24 retained at 6.5 per cent
-- Inflation forecast revised to 5.4 per cent
-- Enhanced transactions limits for small value digital payments to ₹500 from ₹200 in UPI Lite
-- To absorb surplus liquidity generated by various factors, including return of ₹2000 notes to the banking system

The 10-year benchmark 7.18% 2033 bond yield is expected to be in the 7.19%-7.23% range till MPC decision, ending at 7.2140% in the previous session

A revision in RBI’s GDP projections may happen. RBI has projected India’s GDP growth rate for 2023-24 at 6.5 per cent and kept it unchanged in last two policy reviews.

Since last policy, global crude rates have averaged around $89 per barrel, higher than the $85 per barrel factored into RBI estimates. It spiked to over $97 per barrel towards end of September before easing to $90 per barrel early this month.

Das says it's more on the liquidity situation in the money markets, prompting the RBI to adopt actions dealing with frictional and durable liquidity management

The medium-term investment outlook for India continues to be positive, with improvements in infrastructure, and potential shift in the GDP to higher levels, Stefan Hofer, MD and Chief Investment Strategist at LGT Bank Asia told Moneycontrol, adding that the US is unlikely to fall into a recession next year, even as the growth slows down a bit

Citigroup, Goldman Sachs see RBI sticking to a hawkish policy stance with "withdrawal of accommodation." Inflation is well above the RBI's target range midpoint of 4% prompting governor Shaktikanta Das to with his cautious approach to this key macro

We are hopeful that the RBI Governor will consider maintaining an accommodative stance to bolster economic recovery. This could translate into lower lending rates, making housing loans more affordable and stimulating home buyer sentiment, says Rishabh Siroya, founder, Siroya Corp

Experts see no visible hike in FD rates in near future, adding that the current rates are at multi-year highs. Many banks have already started reducing interest rates on fixed deposits for certain tenures.

SBI Research in a report suggested RBI prioritising reduction in accommodation measures, adding that it was improbable for inflation to dip below the 5 percent mark throughout the remaining period of the fiscal year 2023-24.

RBI has forecast inflation at 5.4% in 2023/24 but Deutsche Bank expects it to raise that view to 5.5-5.7% today while keeping the GDP forecast unchanged at 6.5%.

Even as the worst of inflation is behind us and core retail prices are on a downward journey, we would still expect the RBI to maintain a bit of hawkishness on inflation dynamics, given various uncertainties such as climate conditions, commodity prices and global risk positioning, say Yes Bank economists Indranil Pan and Deepthi Mathew

The chief Economist of Bandhan Bank said global macroeconomic backdrop were complicated with uncertainties around growth, prompting RBI to to stay watchful, with a likely guidance of rates to remain higher for longer. “Nevertheless, softening in prices of agro commodities since August has offered the MPC some breathing space, which will allow it to refrain from any rate action at the moment.”

We expect status quo position this time as inflation is still high and liquidity tight. Going by RBI's forecast on inflation, it would be above 5 per cent in Q3 too, which will ensure that the status quo prevails for the calendar year for sure and probably Q4 too, said the Chief Economist of Bank of Baroda

RBI has been protecting rupee from depreciating very sharply, Parul Mittal Sinha, head of financial markets at the lender told Bloomberg, adding that RBI will continue to maintain tight liquidity conditions to help support the rupee unless “we see big shocks from the global markets or if crude starts trending higher.”

With inflation still high, a reduction in policy rate looks remote, but in the interest of MSMEs and the economy as a whole, we expect the RBI to maintain the status quo as any further increase will start hurting the growth of the economy, Puneet Kaura, chairman, CII Delhi State Council and MD & CEO, Samtel Avionics, told News 18.

In case of a status quo, interest rates for retail, as well as corporate borrowers, would remain stable. As the inflation trajectory goes downwards, experts don't rule out a rate hike but it may take time.

RBI started increasing the policy rate in May 2022 in tranches, in the wake of the Russia-Ukraine war and took it to 6.5 per cent in February this year. Since then, it has kept the rate unchanged in the last three successive bi-monthly monetary policy reviews.

An erratic south-west monsoon and its effect on inflation will be weighing on Mint Street.
Rainfall across India in the June to September period was 94% of long-period average. Overall sowing area was 0.2% higher than a year ago, covering a total of 1,107 lakh hectares as of Sept. 29.

The central bank may revise its FY24 CPI inflation forecast to 5.5–5.7%, from 5.4% now, eyeing some buffer for potential food price shocks in the months ahead

Retail inflation jumped to a 15-month high of 7.44 per cent in July, as prices of vegetables and other food items spiked

Between the last MPC meeting in August and this time, inflation has gone up, growth remains strong while global factors have turned a little adverse in the sense that the US Federal Reserve is still aggressive in its stance, which has led to hardening of yields. In this situation, the central bank is expected to maintain a status quo on policy rates in the ensuing policy, says Crisil Chief Economist D Joshi

-- Kept repo rate unchanged at 6.5% unanimously.
-- Standing deposit facility rate, pegged 25 basis points below the repo rate, at 6
-- Marginal standing facility rate kept at 6.75%
-- Stance on withdrawal of accommodation remained unchanged with a 5:1 majority

-- Dollar strengthening against rupee, which has fallen nearly 10% between February 2022 and February 2023
-- Global growth outlook grim due to monetary tightening
-- Germany and France seeing recession
-- Slowdown in China, rising crude rate adding to inflation woes

-- Threats to inflation not totally conquered
-- CPI still a distance from RBI's 4% target
-- RBI needs to keep short term rates higher due to surge in US yields
-- Opening of Indian bonds to global investors brings in greater investor scrutiny and market discipline
-- Fiscal deficit target not likely to be breached this year
-- Growth itself is stronger than anticipated both in India and in the US, indicating high income growth and higher propensity to consume.

Consumers are likely to be emboldened to spend more this festive season, whicg could lead to a surge in demand, particularly benefiting interest rate-sensitive sectors like real estate and auto. “While this stability underscores the central bank's confidence in the economy, the underlying hawkish stance hints at the RBI's vigilance against inflation. Thus, while the near-term outlook is optimistic, businesses and investors should stay alert to broader macroeconomic cues and potential policy pivots," says an economist at Prabhudas Lilladher economist.

Analysts see no major movement in domestic equities if the RBI goes for status quo as the market has likely priced in another pause. However, rate-sensitive stocks may see positive movement after the MPC outcome.

With prevailing headwinds, CareEdge expects the RBI to retain its growth projections at 6.5 percent for FY24 as the central bank will likely adopt a wait-and-watch approach. "Seeking better visibility on festive demand trends and estimates of kharif production before making any adjustments," CareEdge said in its note.

Investors should brace for potential volatility, balancing their strategies between growth and inflationary risks. “A discerning focus on resilient sectors will be key in navigating this complex landscape,” an economist at Prabhudas Lilladher told Moneycontrol

While inflation moderated to 6.83% in August, it’s likely to remain elevated for now as oil prices hover around $90 a barrel, above the RBI’s estimate of $85.

We expect the Reserve Bank of India to hold rates and maintain a hawkish stance even with upside risks to inflation receding. This would strike the right balance — supporting growth while buffering against risks of additional Federal Reserve hikes and higher oil prices, says Abhishek Gupta, India economist

With rate move on a likely pause, the RBI may shift its focus to liquidity management, with policy makers seeking to keep cash tight in order to control inflation pressures.

Inflation remains well above the 4% midpoint of the RBI’s target range despite some slowdown recently as food prices eased.

The RBI started increasing the policy rate in May 2022 in tranches, in the wake of the Russia-Ukraine war and took it to 6.5 per cent in February this year. Since then, it has kept the rate unchanged in the last three successive bi-monthly monetary policy reviews.