The RBI on Friday decided to lock rate hikes tightly in the toolbox for the fifth time in a row. The benchmark repo rate stands pat at 6.5%. But keeping up with the Christmas and New Year spirit, Governor Shaktikanta Das came bearing good news, if not the gift of a rate cut.
Citing buoyancy in domestic economic activity, the central bank revised FY24 GDP forecasts by a generous 50 bps to 7% from 6.5%. Q3 growth is now pegged at 6.5%, and Q4 at 6%.
Further in an unusual move, for the next fiscal it provided real GDP projections for three quarters straight as against the tradition of forecasting Q1 estimate alone. FY25 Q1 growth is now pegged at 6.7%, Q2 at 6.5% and Q3 at 6.4%.
As for inflation, FY24 estimates remain unchanged at 5.4%, though Q3 estimates have been revised marginally lower to 5.4% from 5.6%. Q4 inflation is estimated at 5.2%.
Like growth, inflation estimates were given for three quarters of FY25 and it's this forecast that holds the biggest hint of inflation finally returning to RBI's 4% target. Q1 inflation is estimated at 5.2%, Q2 at 4% and Q3 at 4.7%.
Given the prolonged rate hike pause, and easing retail inflation, markets have begun preparing for the last rites of the monetary tightening cycle. The RBI's revised GDP estimate was an icing on the cake, with Nifty scaling the 21,000 mark for the first time.
But Das was cautious not to declare a victory on the inflationary war, dutifully reminding about the unaccomplished 4% target.
The central bank will stay the course and 'remain highly alert' given the near-term risks for food inflation.
Of late, forecasting inflation is more like a tossing coin with no certainty of a head or tail outcome. So Das is unwilling to drop the guard and remain watchful of the second round affects, if any.
Though prices in October softened to 4.9%, the next two readings may breach the upper tolerance band of 6%, thanks to rising prices of vegetables and pulses. As it is, headline inflation remained above RBI's 4% target for 49 months straight, even touching a peak of 7.8% in April, 2022 -- nearly twice the target.
Clearly, for the Monetary Policy Committee (MPC), this is the toughest challenge yet, since the inflation targeting regime began in 2016. As it enters the eighth year, Das took the applause for doing the job right. Stating that the summer of 2022 (peak inflation) was firmly behind us, he commended the collective efforts of monetary and fiscal authorities, including the 250 bps rate hikes, excess liquidity absorption tools, and supply-side measures.
Core inflation is trending lower and household inflation expectations are now better anchored, but given the 4% target remains elusive, monetary policy will need to be actively disinflationary, according to Das.
Hence, the MPC in a 5-1 vote split decided to retain the policy stance unchanged at withdrawal of accommodation to ensure inflation aligns with the target while supporting growth. The Standing Deposit Facility (SDF) remains unchanged at 6.25%, while Marginal Standing Facility (MSF) and bank rate are anchored at 6.75% each.
For markets though, more than a rate action, Friday's policy was all about liquidity management and seeing if Das will spring anymore surprises as he did in both August and October.
The average monthly liquidity absorption has been well below Rs 1 lakh crore for at least two months now. Banking system liquidity moved to surplus this week and policy watchers believe the chances of incremental liquidity tightening are low given the cost of liquidity and with overnight rates hugging the upper band of the policy rate corridor.
According to Das, as government spending picked up and system liquidity is evenly balanced among market participants, pressures have eased and with government spending likely to further ease liquidity conditions, RBI will remain nimble in liquidity management.
He, however, announced a reversal of liquidity facilities under both SDF and MSF even during weekends and holidays with effect from December 30, 2023. The move is expected to facilitate better fund management by banks. It will be reviewed after six months or earlier.
In August, Das surprised markets, introducing the incremental cash reserve ratio (I-CRR) to suck out excess liquidity of over Rs 1 lakh crore from the banking system.
In October policy review too, he kept the market on toes, indicating the central bank's readiness to launch OMOs to remove excess liquidity. Though no such thing happened until Friday, the announcement itself was potent enough to temper the euphoria in the bond markets following JP Morgan’s inclusion of India in its Emerging Market Bond Index.
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