RBI Monetary Policy Key Takeaways: Rates Unchanged, GDP Forecast Raised, Inflation A Concern

Reaching 4% (inflation) can’t be an one-off event, said RBI Shaktikanta Das, adding that MPC should have confidence that the level is durable.

Deputy Governor Michael Patra said that while GDP is at its potential, inflation is way above target.

We have to withdraw accommodation further to bring back inflation to target, he said.

The 7% GDP growth estimate presented by in the monetary policy statement is conservative, said RBI Deputy Michael Patra, on grounds that October, November economic data is looking very robust.

Governor Shaktikanta Das said that there are signs of rural demand turning around, government capex remains very strong and there are signs of revival in private capex.

Private investments are expected to pick up seeing capacity utilisation, Das said.

Confirming that savings bank interest rates haven’t seen much rise, RBI Governor Das said that and RBI will not intervene in the matter.

Interest rates are deregulated and it is a commercial decision by banks, Das said, adding that administered rates would be a retrograde step.

RBI Governor Shaktikanta Das said the central bank refrains from giving forward guidance because of uncertainty in response to a question on prospect of policy rate cuts.

The future looks fickle and new shocks can hit any economy, anytime, he said.

Inflation is still away from 4% and it is not possible in current situation to give forward guidance.

RBI Deputy Governor Swaminathan J said composition of lending in the under Rs 50,000 segment is less than half a percent of total outstandings, and as such doesn’t pose a risk.

Lending without clear end use will get curtailed, he said.

Liquidity is tight because of certain factors not in RBI's control, said Governor Shaktikanta Das.

The central banker reiterated that there is no need to deploy OMO so far, and the instrument will be used instrument when required.

The RBI will not inadvertently communicate on its stance, RBI Governor Shaktikanta Das said in response to a question from NDTV Profit's Vishwanath Nair. It is not correct to say that RBI is moving towards a neutral stance after five consecutive pauses, he said.

RBI Deputy Governor Swaminathan J said it's too early to see effect of announced measures.

RBI expects lenders to conduct themselves and draw business models in which avoidable risk is mitigated, he said.

Bank lending to NBFCs had to be calibrated and that’s been done through risk weights, said the RBI Deputy Governor, adding that the measures are not meant to deny liquidity.

RBI Governor Shaktikanta Das said that monetary policy decisions are still dependent on inflation and growth and it would be wrong to think there is a change of approach.

There is no loosening around the corner, he said.

Prudence at all times is guiding philosophy, said RBI Governor Das, adding that the banking regulator has deepened supervisory methods.

• Liquidity will be actively managed

• Dealing with signs of stress in appropriate way

• Balance sheet of financial sector remains robust

• Endeavour is to act proactively

Emphasising that the CPI inflation is expected to be high in November, RBI Governor Shaktikanta Das said in the post policy announcement press conference that inflation management can't be on autopilot.

MPC will take action to reach inflation target, he said.

The surprise was significant upgrade in GDP growth estimates, said Tanvi Gupta Jain, Economist at UBS.

"The policy was not as hawkish as I was expecting... seemed largely balanced, in fact slightly bullish. (MPC) remains focussed on withdrawal of accomodation stance, five out of six members voted in favour of continuing stance," said Jain said in conversation with NDTV Profit after the monetary policy announcment.

With the liquidity measures taken by the MPC, "looks like they want better fund management at banks," she said.

The UPI limit for hospitals and educational institutions will be raised to Rs 5 lakh from Rs 1 lakh.

RBI will also announce regulatory framework on connected lending. The central bank will also lay down regulatory framework for web aggregation of loan products.

“Do not wait for house to catch fire and then act,” Das said on recent preventive measures taken to address potential risks. “Prudence at all times should be the guiding philosophy both for regulators, regulated entities.”

RBI will allow liquidity facility reversal under SDF and MSF even on weekends, holidays, said RBI Governor Shaktikanta Das.

• Liquidity facility reversal change to come into effect on Dec 30

• Measure on liquidity will facilitate better fund management by banks

• To review liquidity facility reversal after six months or earlier if needed

Deficit conditions continued in October and November, leading to banks tapping MSF and SDF, said RBI Governor Das.

The RBI balance sheet swelled to 28.6% of GDP in FY21, and then moderated to 23.3% in FY23 and further to 21.6% this year, up to Dec. 1, Das said.

System liquidity turned to deficit mode in September after four years, tightening more significantly than envisaged in last policy. While a reason to introduce open market operations has not arisen so far, going further, govt spending will likely ease liquidity conditions, he said.

"RBI will remain nimble in liquidity management."

Significant progress have been made in bringing down inflation, but the target of 4% CPI is yet to be reached, Das said.

Trajectory of food inflation needs to be monitored carefully, he added.

Monetary policy has to stay alert to risks to inflation becoming generalised and actively disinflationary, he said.

Household consumption supported by durable urban demand and gradual turnaround in rural demand, Das said, while festival demand spurred household discretionary consumption in December quarter.

Investments in fixed assets by private companies showed healthy growth. the RBI Governor said. Total flow of resources to commercial sector stood at Rs 17.6 lakh crore in FY24.

Private consumption should gain support from gradual recovery in rural demand, Das said, adding that healthy twin balance sheets of banks and corporates should propel private capex.

While, drag from external demand is expected to moderate, protracted geopolitical turmoil and volatility in financial markets pose risks to outlook

The Reserve Bank of India retained its estimate for retail inflation in FY24, measured by the Consumer Price Index, at 5.4%. The CPI inflation is seen at 5.6% in Q3, 5.2% in Q4 and 5.2% in Q1 of FY25, 4% in Q2 FY25 and 4.7% in Q3 FY25.

It had estimated retail inflation at 5.6% in Q3, 5.2% in Q4 and 5.2% in Q1 FY25 it the last monetary policy meeting.

Indian economy is expected to clock real GDP growth of 7% in FY24, said RBI Governor Das. GDP growth is projected to be 6.5% in Q3 FY24 and 6% in Q4 FY24.

Growth in the third largest economy in Asia is seen at 6.7% during Q1 FY25, 6.5% in Q2 FY25 and 6.4% in Q3 FY25, he said.

In the last MPC meeting, the panel had estimated the economy to record real GDP growth of 6.5% in FY24, with 6% growth in October-December 2023, 5.7% in January-March 2024 and 6.6% in April-June 2024.

Economic activity in India showed buoyancy in the second quarter, the RBI Governor said.

• Two third of rabi sowing has been completed in Q3

• Manufacturing gained strength with easing input cost pressures

• 8 core sectors recorded robust growth

• PMI for manufacturing rose in November

• GST collections at Rs 1.68 lakh crore in November were buoyant

While moderation was observed in all components of CPI, said Governor Das, risks to food inflation may lead to uptick in November and December.

Domestic economic activity is resilient and holding up well, he said.

The MPC remains highly alert, prepared to undertake policy action as required, Das said, adding that previous rate action is still working its way through the economy.

While headline inflation receded from last year, it remains above target in many countries, RBI Governor Shaktikanta Das said.

Core inflation continues to remain sticky, while financial markets remain volatile in their quest for definitive signals, he said.

Indian economy presents picture of resilience and momentum, Das said, emphasising that Q2 GDP exceeded all forecasts and fiscal consolidation is on course.

External balance remaining eminently manageable, the central banker said, adding that it is the RBI's endeavour to further build on these fundamentals.

The Monetary Policy Committee has voted unanimously to keep the policy repo rate unchanged at 6.5%, its fifth pause on the trot and in line with economists' estimates polled by Bloomberg. All members voted in favour of remaining focussed on withdrawal of accommodation stance, while five out of six members voted in favour of continuing stance.

Instead of the rate-setting channel, the RBI's focus now appears to be on using liquidity management tools and macroprudential measures to facilitate the transmission of earlier rate hikes.

Liquidity tightness is likely to continue due to currency in circulation leakage, forex intervention, advance tax outflows and open market operation sales, as and when required, said a research note by Kaushik Das, chief economist at Deutsche Bank.

India's retail inflation has eased, though food inflation headwinds remain. CPI inflation stood at 4.87% in October compared with 5.02% in September. However, food and beverage inflation was steady at 6.24% in October compared with 6.3% in September.

October marked the second straight month of retail inflation staying within the central bank's target of 4(+/-2)%.

While the RBI may raise its annual growth forecast modestly, it is likely to keep its inflation forecasts unchanged, citing uncertainty around the near term outlook due to possible changes in domestic food and international energy prices, Bajoria said.

India's economy grew better than expected in the second quarter of FY24, driven by manufacturing and the government's spending push ahead of elections. GDP grew 7.6% in the July–September quarter, lower than 7.8% in April–June, but significantly higher than economist estimates at 6.8% according to Bloomberg.

Gross value added, which strips out indirect tax and subsidies, is estimated to have grown 7.4% as compared with 7.8% in the previous quarter.

The better-than-expected expansion was driven by manufacturing, which grew 13.9% as compared with a 4.7% rise in the prior quarter.

“With the GDP data for Q2 FY2024 appreciably higher than the MPC's last forecast, and continuing concerns on various aspects of food inflation, we expect the MPC to pause in its December 2023 review, amidst a fairly hawkish tone of the policy document,” stated a research note by ICRA.

India's Monetary Policy Committee is likely to maintain its status quo on the Reserve Bank of India's key lending rate even as inflation eases and economic activity stays resilient.

Of the 38 economists polled by Bloomberg, all except one expect the MPC to hold the rates on the Reserve Bank of India's repo rate on Friday. The benchmark policy repo rate currently stands at 6.5%.

With strong growth momentum, core inflation declining, and the global backdrop turning more benign, the RBI's policy optionality is widening, Rahul Bajoria, chief economist at Barclays, said in a note. "Still, we expect the bank to stay cautious, taking macro prudential steps to curb lending, while keeping an eye on supply shocks and potential second-order inflationary effects."