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    HomeNewsOpinionMoneycontrol Pro Panorama | MPC Decision: Salad Days

    Moneycontrol Pro Panorama | MPC Decision: Salad Days

    In today’s edition of Moneycontrol Pro Panorama: India Inc records rising cash flows, signs of moderation visible in banking sector, healthcare service providers under the weather, Go First needs a change in strategy for revival plans, and more

    Manas Chakravarty
    August 10, 2023 / 15:16 IST
    RBI MPC
    Dear Reader, A saying attributed to various people goes: ‘Knowledge is knowing that tomato is a fruit, wisdom is not putting it in a fruit salad’. Yet the Monetary Policy Committee (MPC), to its eternal shame, said, “Going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory.” Clearly, they lack the knowledge that tomato is a fruit, indeed one that was supposed to have aphrodisiac powers, as evidenced by the French calling it pomme d’amour, or love apple. The upside is that, by the same logic, the MPC members are unlikely to put tomatoes in a fruit salad, thus making up in wisdom what they lack in knowledge. That wisdom is seen in their determination to ‘look through’ the rise in food prices to the low inflation beyond and keep the policy rate unchanged, despite raising the retail inflation forecast for the current fiscal year to 5.4 percent, up from 5.1 percent projected at the last MPC meeting in June. Putting it another way, despite the widespread belief that tomato prices are a hot potato, the MPC thinks it is small potatoes. 

    That doesn’t mean, though, that the RBI governor is as cool as a cucumber and he doesn’t give a fig about tomatoes. He said, ‘The frequent incidences of recurring food price shocks, however, pose a risk to anchoring of inflation expectations’. He added, ‘We have to stand in readiness to go beyond keeping Arjuna’s eye to deploying policy instruments, if necessary.’ As my colleague Aparna Iyer points out, these instruments could include an increase in the incremental cash reserve ratio, which will affect liquidity. 

    While the inflation outlook is a bit of a lemon, the MPC is full of beans about growth. The growth forecast for FY24 has been retained at 6.5 percent. What’s more, the RBI governor also said, ‘The total flow of resources to the commercial sector from banks and other sources taken together has increased by ₹7.5 lakh crore during the financial year 2023-24 so far (up to July 28) as compared with ₹5.7 lakh crore a year ago.’ That’s an increase of 31.6 percent from a year ago, testimony to the strong growth momentum in the economy, in spite of the rate hikes by the central bank. 

    With that kind of growth momentum and with abundant liquidity, could there be a risk of inflation spilling over to the broad economy? The RBI took a small step in draining some of the liquidity, by a temporary increase in the incremental cash reserve requirement ratio to 10 percent. It’s such an itsy-bitsy teen-weeny step that it reminded me of these lines from the famous song:  

    She was afraid to come out of the lockerShe was as nervous as she could be.Be that as it may, the RBI has reiterated that it is ‘firmly focused on aligning inflation to the target of 4.0 per cent’, which means that chances of any rate cuts this fiscal year are dim--the policy rate will remain high for longer. Does that mean growth will slow? Well, interest cover for the listed non-financial sector and for listed manufacturing companies is much higher now than it was in the years before the pandemic. Rising interest rates don’t seem to have held back growth or affected profits. And the government is certain to do all it can to reduce food inflation in the run up to the general election next year.  RBI governor Das also said investment activity has gained steam on the back of government capital expenditure, rising business optimism and revival in private capex in certain key sectors. Construction activity remains strong. Further, Das clearly said, ‘Aggregate demand conditions continue to be buoyant.’ 

    All that should support the markets, despite the temporary scare from tomatoes. For the Indian economy, it’s still peaches and cream. 

    Investing insights from our research team

    What could be the implications of RBI’s monetary policy on banks?

    RateGain continues to cruise fast

    Zee Entertainment: Weak performance, ad spend recovery delayed

    Bharat Forge Q1: Strong set of numbers, valuation demanding

    Home First Finance Q1 FY24: Profit surge on higher loan and asset growth

    What does Aarti’s result hold for the chemical sector?

    TVS Supply Chain Solutions IPO: Global factors dampen the growth narrative

    Emami: Margins to improve, growth likely to come back

    IdeaForge Technology: Pricing in too much optimism

    What else are we reading?

    A downgrade, resilient jobs, incoming higher inflation: How should market read them all?

    A new Licence Raj is not the best way to promote domestic manufacturing

    Is Q1 as good as it gets for India’s banks?

    Soft summer season hits healthcare service providers

    Chart of the Day: What do India Inc’s rising cash flows signal?

    LEX: Lyft — Fare cuts bring little cheer for Uber peer (republished from the FT)

    India's PC import restrictions provide neither carrot nor stick

    Does money win the war — Inferences from the Russian push in defence expenditure

    Delay in Go First’s revival plan calls for a change in strategy

    Fitch was right: political dysfunction and reckless fiscal policy impair US debt

    Three factors that prevent India and China from getting close

    Can Tesla’s magic survive without its wizard?

    N Vittal: Bureaucrat who made the software horse fly

    Personal Finance

    What NRIs must keep in mind when investing their money

    Technical Picks: Ashok Leyland, Castor seed, GAIL, Steel Authority of India and Varun Beverages (These are published every trading day before markets open and can be read on the app).

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    Manas Chakravarty Moneycontrol Pro
    Manas Chakravarty
    Manas Chakravarty
    first published: Aug 10, 2023 03:16 pm

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