RBI Maintains Status Quo: Remains Vigilant of the Inflation and Liquidity

The Reserve Bank of India (RBI) paused for 4th time in a row, kept the repo rate unchanged and maintained stance as "withdrawal of accommodation". It was the fourth bi-monthly monetary policy of FY24 and decision was unanimous to keep the policy repo rate unchanged at 6.50% and majority of 5 out of 6 members voted to remain focused on "withdrawal of accommodation". The decision was largely on expected lines. Since May 2022, there has been a cumulative rate hike of 250 basis points undertaken by the MPC, which is still working through the economy as per the RBI.

Though near-term inflation is expected to soften on the back of vegetable price correction and reduction in LPG prices, the RBI has reiterated that it remains highly focused on anchoring inflation and is prepared to undertake timely policy measures to align inflation to its target of 4% on a durable basis. The major risks to inflation include food and fuel price shocks shaped by area sown for pulses, low reservoir levels, El Niño conditions (slower rate of expansion on the uneven monsoon), global food prices, volatile energy prices and evolving geopolitical conditions.The RBI kept its FY24 CPI inflation forecast unchanged at 5.4% while flagging risks from food inflation which could last longer.

The RBI stayed optimistic on growthwith GDP growth projection retained at 6.5% for FY24. The RBI highlighted the resilience shown by the economy amidst slowing of global economy under the impact of tight financial conditions, protracted geopolitical tensions and increasing geo-economic fragmentation. The same is driven by momentum in agricultural activity in Q2FY24, extended recovery of industrial sector in Q2, buoyancy in services sector activity, good support from government capex, urban expansion, rural revival and private capex. The RBI also highlighted financial stability as the twin balance sheet stress has now been replaced by a twin balance sheet advantage with healthier balance sheets of both banks and corporates.

RBI announced that it will consider OMO-sales (Open Market Operation - G sec sales) to manage liquidity, consistent with the stance of monetary policy with timing and quantum dependent upon the evolving liquidity conditions. It seem that the rationale for considering OMO G sec sales seems to be two fold i) reducing liquidity to ensure transmission of previous rate hikes ii) to manage spill over effects of global rout in bonds and local Inflation.

As expected, the policy remained hawkish with emphasis on liquidity management and RBI continues to be watchful of inflation to maintain macro-economic stability and sustainable growth. Given that CPI inflation for Q1FY25 is projected at 5.2%and RBI considering selling bonds to soak up excess funds from the banking system, we don't expect another rate hike by RBI and the next policy move ( towards monetary easing) likely to be in FY25. Even though we don't see any policy action on the Rate front form RBI, movement in global bond yields, the quantum and maturity of G sec under OMO sale may decide the trajectory of bond yields in the near term.

Deepak Agrawal, CIO- Fixed Income, Kotak Mahindra Asset Management Company