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Published: October 3, 2023
Updated: October 3, 2023

Anticipating the RBI's Monetary Policy Review: A Balanced Approach

The upcoming Monetary Policy Committee (MPC) meeting of the Reserve Bank of India (RBI) scheduled for October 4-6, 2023, has generated significant interest. In this article, we delve into the expectations surrounding the MPC's decision, examining key factors influencing their stance on policy rates.

Inflation Expectations:

The recent surge in Consumer Price Index (CPI)-based inflation, which hit a 15-month high of 7.4 percent in July 2023, appears to be temporary. Notably, it eased to 6.8 percent in August and is projected to further decrease to 5.5 percent in September, mainly due to falling tomato prices. This trajectory indicates an average CPI inflation reading of 6.6 percent for Q2FY24, exceeding the MPC's estimates. However, the overshooting is expected to be short-lived, with Q3 and Q4 FY24 projections aligning closely with our own.

Core Inflation and Potential Risks:

Core inflation has been on a downward trajectory, reaching a 22-month low of 5.1 percent in August 2023, providing some respite to the MPC. Nevertheless, concerns linger due to unpredictable monsoons and recent spikes in crude oil prices, factors that could introduce a hawkish tone to the MPC's commentary.

Growth Outlook:

GDP growth for Q1FY24 was encouraging, at 7.8 percent, only slightly below the MPC's estimate of 8 percent. High-frequency indicators point to continued robust economic activity in Q2FY24, driven by construction and domestic demand. However, it's expected that GDP growth will taper in H2FY24 due to multiple headwinds, including a less favourable base, agricultural challenges from below-normal monsoons, and the impact of previous monetary tightening.

MPC's Forward-Looking Approach:

The MPC's projection of 5.2 percent CPI for Q1FY25 implies a forward-looking real policy rate of 1.3 percent. The prevailing consensus suggests that maintaining a higher real rate is unnecessary at this juncture. As such, we anticipate the MPC will opt to keep policy rates unchanged during the upcoming meeting, accompanied by a cautious stance on inflation, while maintaining their commitment to achieving the 4 percent inflation target.

Liquidity Concerns:

Systemic liquidity tightened notably in the latter half of September 2023, primarily due to advance tax outflows. However, this situation is expected to be transitory, with a substantial amount set to return to the banking system. We anticipate that the MPC will retain its policy stance, considering concerns over excess liquidity expressed by committee members in the August 2023 minutes.

As the RBI's MPC convenes for its October 4-6 meeting, it is anticipated that they will maintain the status quo on policy rates for the fourth consecutive time. The current economic landscape, marked by moderating inflation and growth prospects influenced by various factors, calls for a balanced and cautious approach. The RBI's commitment to achieving its inflation target while supporting economic recovery will be closely watched, as it navigates the complexities of India's fiscal and monetary landscape.