The RBI will Continue its 'Prolonged Pause' Posture

By Consultants Review Team Monday, 23 October 2023

The October minutes of the RBI MPC indicated members' heightened attention on returning inflation to the 4% objective. While supply-side shocks were temporary, MPC members emphasized that their recurrence increased generalization risks. Some members also emphasized the importance of actively managing liquidity. Kotak Institutional Equities reiterated its position on the MPC's lengthy pause and predicted that system liquidity would remain tight in the short term.

"The minutes of the October RBI MPC meeting revealed members' concerns about recurring shocks, raising uncertainty about the inflation outlook." We see upside inflation risks emanating from (1) increased crude oil prices and (2) weather-related disruptions. "We do not see inflation staying near the 4% target for the foreseeable future," stated Kotak Institutional Equities in its research. 

"As a result, we maintain our expectation of a prolonged pause by the RBI." Furthermore, we expect the RBI to maintain tight liquidity conditions in the short term to create a buffer against any adverse global event," it said.

On October 20, the RBI published the minutes of the Monetary Policy Committee (MPC) meeting, stressing that India's headline inflation is over the tolerance zone and its alignment with the objective is being disrupted. As a result, it stated that monetary policy must stay actively anti-inflationary. "Our fundamental goal is to align inflation with the 4% target and anchor inflation expectations," stated RBI Governor Shaktikanta Das in the minutes.

Concerns about growth remain minimal

According to Kotak Institutional Equities, all members alluded to the persistence of inflationary pressures from periodic supply shocks and noted that, while the shocks were transitory, the strength of the shocks had increased, raising the risks of inflation generalization. The RBI Governor further stated that the repeated character of these shocks raises the concerns of (1) probable monetary policy credibility loss and (2) de-anchoring of inflation expectations. MPC members also remarked that the minor monsoon shortfall was more likely to create "a few short-lived inflation spikes rather than a sustained rise in inflation."

On growth, all members voiced satisfaction, citing the resilience shown thus far, despite uneven global development. The RBI Governor further stated that the recent policy combination promoted economic stability. Meanwhile, MPC member MD Patra emphasized that price stability must be a priority because it can derail development prospects by reducing purchasing power.

The RBI will actively manage liquidity

Some MPC members acknowledged the importance of active liquidity management. Governor Shaktikanta Das stated that liquidity will be ample in the coming months, notwithstanding an expected increase in government spending. However, CIC leakage may offset some of this. Ashima Goyal emphasized that fine-tuning liquidity was insufficient to keep the WACR close to the repo rate. Ashima Goyal also pointed out that, in the face of various shocks to short-term liquidity, durable liquidity would need to be altered (using mechanisms such as OMOs) to offset the impact.


Current Issue