The MPC’s growth-inflation forecasts put forth a merry growth story for India. India’s GDP is seen to clock a 7.0% growth, 0.5% higher than October forecasts. This upward revision comes against the backdrop of improved growth prospects that the MPC sees persisting through the next one year.
The growth outlook in the wake of ongoing disinflation is building up the case of a ‘goldilocks’ like scenario for India in 2024, while the MPC remains watchful on the food-led price shocks.
The growth-inflation outlook laid out at the MPC indicates that the economic activity may not exactly need any immediate monetary support by way of policy rate cuts as the RBI remains gung-ho on India’s growth story and confident about the disinflation path.
The policy remaining ‘actively disinflationary’ to ensure a durable alignment of headline inflation to the target rate of 4.0% in our assessment suggests that we could be in for a long pause on the policy rate.
While the MPC has not raised policy rates by way of modulating the system liquidity and keeping the daily banking system liquidity under the LAF window in a deficit mode, the cost of funds for the banks remains on the upper end of the policy corridor at 6.75%. Thus, banks could expect the cost of funds to remain on the higher side, owing to the liquidity situation and year-end credit demand.
Meanwhile, the policy transmission of 250 bps is seen percolate to lending rates, apart from the External Benchmark Linked Rate (EBLR), which has seen a complete pass-through of the 250bps of hikes during May 2022-December 2023.At this policy, there were no major policy announcements either on liquidity or macroprudential rules. The operational change, however, on the RBI’s Liquidity Adjustment Facility (LAF) window where the banks borrow and lend under the MSF; SDF windows – has now been allowed for the reversal of these too.
An operational measure of reversal of the MSF/SDF facilities over the weekends is expected to help better fund management for banks. This should also help smoothen out the cost of borrowing of banks that either had to keep money parked and/or tap markets till resources freed up should help smoothen out the bank liquidity operations, this augurs well, especially for those banks that are active on the MSF window, given that volume is observed to be higher under MSF than on SDF window.
While the RBI did not announce any new measures on the liquidity front, it reiterated that it remains nimble in liquidity management and that policy instruments such as Open Market Operations (OMO) Sales are not off the table. In the absence of any surprises, the 10Y sovereign bond yield hardened to 7.26% levels while the equity markets ended a little shy of 21K.
The MPC’s ‘actively disinflationary’ approach and the RBI’s proactive policy steps by way of liquidity tinkering and the macroprudential rules classifies the Central Banker as an ardent observer, watching out for risks and managing by proactive policy interventions. The recent tinkering of risk-weights on unsecured loans announced mid-November 2023, coupled with today’s policy measures on connected lending, the framework for web aggregators of loan products, and the setting up a repository for FinTech are all suggestive of RBI’s objective of building a robust financial sector.
The regulatory steps continue to strengthen the financial sector and its stability.
(Achala Jethmalani is an economist at RBL Bank)
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