Economists expect a status quo on rates and tighter liquidity conditions to persist in 2023 after the RBI's monetary policy committee decided on Friday to keep the benchmark repo rate unchanged.
The Reserve Bank of India reaffirmed its commitment to aligning inflation to the target and ensuring that liquidity conditions evolve in sync with the monetary policy stance.
Liquidity To Remain Tight
The RBI did not announce any durable liquidity-absorption measures, like a raise in the cash reserve ratio, given the pulls and pressures on liquidity conditions in the coming months, according to Abheek Barua, chief economist at HDFC Bank Ltd. However, the central bank signalled that, if required, it is open to conducting the open-market operation sale of government securities to manage liquidity conditions.
That signals the RBI's preference for tighter liquidity conditions due to inflation risks and financial stability concerns as liquidity tightens globally, Barua said. This also aligns with the central bank's reiteration that it wants to anchor inflation at 4%, and keeping it below the upper band of the target range at 6% was not enough.
The benchmark 10-year yield is likely to trade higher with the door being opened for OMO sales, according to Barua. Elevated U.S. yields can also continue to exert pressure in the near term.
OMOs To Remain Small
Liquidity conditions are likely to get progressively tighter with a pickup in currency leakage during the festival season, according to Gaura Sengupta, India economist at IDFC First Bank Ltd.
Core liquidity would likely rise to Rs 3.3 lakh crore after the complete withdrawal of the incremental CRR on Oct. 7, Sengupta said. By October-end, it is expected to reduce to Rs 2.7 lakh crore with a pickup in currency leakage. He expects core liquidity to reduce to sub-Rs 2 lakh crore by December.
If there are balance-of-payment outflows, then liquidity conditions could be tighter. The elevated U.S. Treasury yields are likely to limit active foreign portfolio investment inflows into government securities ahead of India's inclusion in the global bond index next year.
Hence, despite the explicit reference to OMO sales, the quantum is likely to remain small until the third quarter of the financial year.
Higher For Longer
Any consideration of a pivot towards monetary easing has been pushed to the second half of 2024, according to Rahul Bajoria, chief economist at Barclays.
The RBI has highlighted risks from generalisations of price pressures and their impact on inflation expectations, especially given that food and fuel account for a major proportion of consumer expenditure, Bajoria said.
The vulnerability of inflation to supply shocks, as seen in the past two months, and the still-steady momentum in growth suggest little reason for a change in approach, he said. "Thus, we continue to expect the RBI to remain on hold for the rest of FY23–24, with a window for a rate cut only opening by July–September 2024."
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