Clearly, RBI is more optimistic on the domestic growth prospects
FinTech BizNews Service
Mumbai, December 8, 2023: Reserve Bank of India announced its monetary policy on Friday.
Suman Chowdhury, Chief Economist and Head, Research, Acuité Ratings & Research, states: Expectedly, RBI-MPC has persisted with the pause mode on the monetary policy with the repo rate at 6.50% and the stance unchanged at “withdrawal of accommodation”. However, the intensity of hawkishness in the policy statement has clearly subsided and a balance has been brought in. The governor has also highlighted that “over-tightening” can also pose growth risks to the economy which possibly provides a signal that the policy stance may be subject to review in the subsequent MPC meetings.
Clearly, RBI is more optimistic on the domestic growth prospects after the release of GDP data for the second quarter which placed GDP growth for H1 at 7.7% YoY. Compared to its earlier growth forecast of 6.50% for FY24, the revised growth forecast of the central bank stands materially higher at 7.0%. Given the expected moderation in rural demand in H2 and the weaker private consumption growth at 3.1% in Q2FY23, Acuité Research has however, pegged the growth forecast relatively lower at 6.50%.
From the inflation perspective, RBI MPC has maintained the CPI inflation forecast at 5.4%. However, it has also sounded a caution on the upside risks to food inflation due to supply shocks in the near term, reiterated its target CPI inflation of 4.0%, and indicated that supply-side risks will make the MPC exercise caution before any revision in the benchmark rates. Further, the strong growth expectations will also not put any pressure on the MPC to go for a rate reduction in haste and we continue to believe that any such rate cut is unlikely to happen before the second half of CY24.
The statement has also addressed the market concerns on liquidity by clarifying that OMO will be adopted only if required and currently, the liquidity is already in a relatively tight mode. Further, an operational issue for banks and money market participants has been resolved by permitting balance adjustments to the MSF and SDF in holidays and over the weekends. This will help in normalizing the sharp swings in system liquidity and prevent excessive volatility in call money or other short-term rates.
RBI has also talked about a “unified regulatory framework on connected lending” which highlights that the central bank has concerns on lending excesses through NBFCs and risks of multiple lending and plans to address it through appropriate data tracking and policies.”
