The Reserve Bank of India (RBI) made its expected decision during the October 6 bi-monthly policy review, maintaining the status quo on interest rates. However, there were a couple of surprising elements in the policy announcement.
Firstly, the RBI mentioned its intention to conduct open market operations (OMO) sales periodically to absorb excess liquidity. Additionally, RBI Governor Shaktikanta Das emphasized that the central bank's target rate for the Consumer Price Index (CPI) is 4 percent, not the wider band of 2-6 percent.
Despite the recent spike in global yields, the RBI's Monetary Policy Committee (MPC) chose to overlook it, citing evolving global market volatility as a key risk to monitor.
On the inflation front, there is optimism after the spike observed in July and August. The headline CPI is expected to moderate, and the RBI is encouraged by the Core CPI, which has eased to 4.8 percent since the beginning of the year.
Furthermore, the RBI's surveys indicate improvements in anchoring inflation expectations. Therefore, the central bank made only slight adjustments to its CPI inflation forecasts for Q2, Q3, FY24, keeping the overall FY24 and Q1FY25 forecasts unchanged at 5.4 percent and 5.2 percent, respectively.
The RBI observed that the Indian economy is in a robust position, with strong demand conditions, steady agricultural momentum, government-led capital expenditure, recovery in industrial and manufacturing activity, active construction, and a thriving services sector. While demand conditions are expected to improve further, the RBI remains vigilant regarding global risks, particularly financial volatility, geopolitical uncertainties, and economic fragmentation.
Regarding liquidity, while the incremental cash reserve ratio (I-CRR) measure has maintained tight liquidity, the RBI noticed imbalances within the banking system. Some banks chose to park liquidity at the SDF window, while others borrowed significantly at the MSF window, resulting in an increase in the weighted average call money rate.
The upcoming expiration of the I-CRR window will inject liquidity into the system and ease pressure on call money rates. However, the RBI may need to conduct OMO sales to absorb excess liquidity and control inflation.
The key takeaway from this policy is the RBI's commitment to achieving a 4 percent CPI target, not a broader 2-6 percent range. This suggests that even if CPI prints fall below 6 percent, the MPC will maintain its stance of tight liquidity.
Governor Das emphasized that inflation remains a significant risk for the Indian economy, and the MPC is determined to bring inflation closer to the target while supporting growth.
While global yields and oil price fluctuations pose risks, the RBI is expected to maintain its stance of no rate hikes or cuts for an extended period. High-interest rates in India are anticipated to persist, with a potential rate reversal not likely until April 2024, subject to global economic conditions and central bank actions.
In the event of another Fed rate hike and continued hawkishness, the RBI may face pressure to make residual rate adjustments, given the prevailing tight liquidity conditions and the potential for intermittent OMO sales.
Valiant Laboratories IPO GMP
Firstly, the RBI mentioned its intention to conduct open market operations (OMO) sales periodically to absorb excess liquidity. Additionally, RBI Governor Shaktikanta Das emphasized that the central bank's target rate for the Consumer Price Index (CPI) is 4 percent, not the wider band of 2-6 percent.
Despite the recent spike in global yields, the RBI's Monetary Policy Committee (MPC) chose to overlook it, citing evolving global market volatility as a key risk to monitor.
On the inflation front, there is optimism after the spike observed in July and August. The headline CPI is expected to moderate, and the RBI is encouraged by the Core CPI, which has eased to 4.8 percent since the beginning of the year.
Furthermore, the RBI's surveys indicate improvements in anchoring inflation expectations. Therefore, the central bank made only slight adjustments to its CPI inflation forecasts for Q2, Q3, FY24, keeping the overall FY24 and Q1FY25 forecasts unchanged at 5.4 percent and 5.2 percent, respectively.
The RBI observed that the Indian economy is in a robust position, with strong demand conditions, steady agricultural momentum, government-led capital expenditure, recovery in industrial and manufacturing activity, active construction, and a thriving services sector. While demand conditions are expected to improve further, the RBI remains vigilant regarding global risks, particularly financial volatility, geopolitical uncertainties, and economic fragmentation.
Regarding liquidity, while the incremental cash reserve ratio (I-CRR) measure has maintained tight liquidity, the RBI noticed imbalances within the banking system. Some banks chose to park liquidity at the SDF window, while others borrowed significantly at the MSF window, resulting in an increase in the weighted average call money rate.
The upcoming expiration of the I-CRR window will inject liquidity into the system and ease pressure on call money rates. However, the RBI may need to conduct OMO sales to absorb excess liquidity and control inflation.
The key takeaway from this policy is the RBI's commitment to achieving a 4 percent CPI target, not a broader 2-6 percent range. This suggests that even if CPI prints fall below 6 percent, the MPC will maintain its stance of tight liquidity.
Governor Das emphasized that inflation remains a significant risk for the Indian economy, and the MPC is determined to bring inflation closer to the target while supporting growth.
While global yields and oil price fluctuations pose risks, the RBI is expected to maintain its stance of no rate hikes or cuts for an extended period. High-interest rates in India are anticipated to persist, with a potential rate reversal not likely until April 2024, subject to global economic conditions and central bank actions.
In the event of another Fed rate hike and continued hawkishness, the RBI may face pressure to make residual rate adjustments, given the prevailing tight liquidity conditions and the potential for intermittent OMO sales.
Valiant Laboratories IPO GMP
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