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Systematix Research Report
Reserve Bank of India announced a status quo on policy rates and stance on the widely expected line but kept the statement hawkish taking a stricter view on curbing inflation further to its target of 4%, thus giving an impression of keeping rates elevated at 6.5% for longer.
The continued uncertainties relating to policy rates in major economies viz the U.S. and Europe, where central banks remain hawkish despite recent aggressive tightening could be limiting RBI's degree of freedom.
RBI's statement of growth resilience and strength sounds contrary to some it its own survey results. But it may serve the purpose of justifying a hawkish stance.
RBI to defend its higher for longer stance –
Following the recent deceleration in credit growth, bank credit-to-deposit ratio has moderated from a peak of 75.7% in March 2023 to 75.6%. If the moderation in credit demand continues and credit growth converges to deposit growth the resultant sustenance of surplus liquidity can intensify the bull flattening trend in the G-sec curve as the money market rates move lower than the repo rates.
This would thereby challenge RBI's monetary policy stance of ‘higher for longer'. RBI is cognizant of this consequence where it is pre-warning the banks about wanting to start reducing rates on the presumption of future RBI actions. This indicates that RBI may use its liquidity absorption tools to defend its higher-for-longer stance.
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