Our view is that any chance of a rate cut is pushed out to Q2FY25
Indranil Pan & Deepthi Mathew
Economics Knowledge Banking
YES BANK
The MPC members were of the view that the near-term inflation outlook is likely to improve on the back of correction in vegetable prices and reduction in LPG prices. However, the risks to future inflation trajectory exist on account of (i) lower area sown under pulses (ii) dip in reservoir levels (iii) El Nino conditions, and (iv) volatile global energy and food prices. This calls for the need to keep rates at restrictive levels for anchoring inflation expectation and bringing inflation back to the 4% target level. One member was of the view that the repetitive supply shocks are challenging and test the inflation fighting credibility of central banks. We retain our view that any chance of a rate cut is pushed out to Q2FY25.
Cautious view on inflation & growth: Though the spike in inflation during July-August appeared to be transitory, the MPC members were of the view that the pressures on the price conditions remain. Dr Bhide was of the view that the uneven distribution of rainfall in the current monsoon period is a source of concern for food prices and favorable weather for the rabi season would be crucial for keeping food inflation moderate. Dr Ranjan said that the waning of transitory food price shocks, the ongoing transmission of past monetary policy actions, improvement in supply chains, strong supply side intervention by the Government, and likely lower rate of increase in selling prices by firms would support the inflation trajectory going forward. However, he stressed the need to guard against risks from recurring weather-related events and rise in global energy prices. Dr Varma pointed out that shortfall and spatial-temporal dispersion in the SW monsoon would cause volatility in food prices, though it is expected to be short lived. Dr Patra pointed out that there is growing evidence that inflation is undermining growth through lower discretionary spending that translates to slowing sales growth of corporations. On the growth front, though domestic demand conditions continue to be supportive, headwinds from global factors like geopolitical tensions, volatile financial markets and energy prices, and climate shocks pose risks to the outlook. Two members were confident of growth as the consumption demand is also seeming to be supported through the credit cycle. The shift to physical savings would be supportive to growth either through direct addition to gross capital formation or by assisting upturn in private capex.
Managing liquidity:
Dr Goyal pointed out that short term liquidity adjustments are necessary to keep the WACR within the band of LAF corridor. She further added that the fine-tuning of liquidity is not as yet adequate to keep the WACR at the MPC mandated repo rate. In scenarios where the short-term liquidity is unable to compensate, the durable liquidity must be adjusted through OMO purchases or sales. Governor Das highlighted that the RBI has maintained a flexible and adaptive approach to liquidity management. He added that the RBI will remain nimble footed and ensure that liquidity is actively managed by undertaking whatever operations necessary from time to time, including OMO sales.
Higher for longer
The messaging was clear in today’s MPC minutes that the RBI intend to keep the rates ‘higher for longer’. Though inflation is showing signs of moderation, especially the core inflation, RBI will continue to remain vigilant and keep rates at the restrictive level till the inflation falls back to the 4% target level. Dr Varma was of the view that the guidance that the market really needs is not about how high the terminal repo rate would be, but about how long the rate would be maintained at a high level. He further added that the MPC should communicate its intention to keep real interest rates high enough as long as necessary to bring inflation to 4% target on a durable basis. Dr Ranjan stressed the need to anchor inflation expectations as the occurrences of multiple large adverse supply shocks run the risk of a drift in inflation expectations from underlying trend. He was of the view that such supply shocks are challenging and test the inflation fighting credibility of central banks. Echoing a similar view, Governor Das said that recurring incidences of large and overlapping supply side shocks bring with them the risks of generalization of inflation impulses, possible loss of monetary policy credibility and de-anchoring of inflation expectations. In his speech today at an event, he further stressed that the monetary policy must remain actively disinflationary to ensure that the decline in inflation from its peak of 7.44% in July continues smoothly. Given the current dynamics, we expect the RBI to be on an extended pause and any rate cut scenario is pushed out to Q2FY25.
