MPC likely to hold rates again as inflation worries persist, say economists, bankers

Rahul Bajoria, Managing Director (MD) and Head of EM Asia (ex-China), Economics, Barclays, said: “We expect the MPC to maintain the monetary policy stance towards a withdrawal of accommodation despite deficit liquidity conditions. Additionally, the MPC is likely to flag a moderation in the pace of monetary transmission, as spreads of lending rates over the repo rate have narrowed in the past few months.”

Anubhuti Sahaya, Economist, Standard Chartered, highlighted that the central bank will opt for a status quo in repo rate and said that RBI’s guidance on liquidity should be watched.

“Vigil on inflation is likely to remain high amidst likely increase in inflation towards 6 percent and a still strong growth momentum. Any guidance on liquidity is likely to be watched out, though with high inflation, easier liquidity conditions look unlikely,” Sahay said.

Since the April monetary policy, the RBI has kept the repo rate unchanged at 6.5 percent, after raising it by 250 basis points (bps) since May 2022. This was after inflation showed signs of moderating. One basis point is one-hundredth of a percentage point.

Inflation

India’s July-September 2023 GDP growth stood at 7.6 percent versus 6.2 percent in July-September 2022. At 7.6 percent, the latest quarterly growth number is significantly higher than expectations. An earlier poll by Moneycontrol had shown economists expecting GDP growth for the second quarter of 2023-24 to be at 6.8 percent, with the highest forecast being Standard Chartered Bank's 7.2 percent.

Also read: India’s Q2 GDP growth beyond expectations, RBI may opt for a hawkish stance

Meanwhile, the Reserve Bank of India (RBI) had forecast a growth rate of 6.5 percent.

But after the surprising Q2 GDP growth numbers, experts said that the central bank will revise its GDP estimates.

“Post the much stronger-than expected Q2FY24 GDP print and Q3 print tracking at 6.3 percent, as per RBI’s Nowcasting model, which is marginally higher than the RBI’s estimate of 6 percent, the central bank is likely to revise-up its FY24 GDP growth estimate to 6.8 percent from the current estimate of 6.5 percent,” said Gaura Sen Gupta, Economist, IDFC First Bank.

Liquidity

Core liquidity, as of November 24, has reduced to Rs 2.2 lakh crore from Rs 3 lakh crore as of October-end, mainly due to the rise in currency leakage during the festival season. Forex outflows have also fallen as balance of payments have turned negative since the July-September FY24 quarter, experts said.

Here, Sen Gupta said that OMO (Open market operation) sales (via auction) are unlikely to happen as liquidity conditions remain tight. “We expect core liquidity to reduce further to Rs 1.7 lakh crore by the end of December 2023,” Sen Gupta said.

Das of Deutsche said: “Liquidity tightness will continue due to CIC (currency in circulation) leakage, FX intervention, advance tax outflows and OMO sales, as and when required.”