RBI Keeps Rates Unchanged, Analysts See Policy Neutrality Soon

Mumbai, Dec 8 (PTI) Analysts across the board have termed the central bank's move to keep ample systemic liquidity as a sign of moving towards policy neutrality and have ruled out a rate cut before the second half of next year.

Earlier in the day, the central bank-led monetary policy committee left the rates unchanged at 6.50 per cent for the fifth time in a row but underlined their resolve to keep all energies on fighting inflation saying there is no room for loosening the rates now at all as inflation is way off the target.

The status quo policy was unveiled on Friday as expected, Abheek Barua, the chief economist of HDFC Bank said noting however, “the RBI seems less hawkish on liquidity management compared to the previous policies which could be seen as a signal of a move towards neutrality."

"This implies that while the RBI is likely to act against a significant surplus, it might also not favour a large deficit going forward. Accordingly, we see some near-term downward pressures on liquidity due to tax outflows but a more comfortable position beginning 2024 led by higher government spending and foreign inflows."

He also noted that, structural changes like the opening of the SDF and MSF windows on weekends and holidays can also help aid more symmetric liquidity balances in the system. The overnight rate can start moving towards the repo rate from being close to the MSF over the coming months.

The liquidity stance also seems to be in line with the inflation forecast which shows a gradual move towards 5.2 per cent and 4 per cent in Q1 and Q2 of FY25, Barua said.

Sunil Kumar Sinha, the principal economist at India Ratings said while the central bank is more upbeat about growth, jacking it up by 50 bps to 7 per cent for this year, it is not so sanguine about inflation.

The RBI is not as sanguine about the inflation and has kept its retail inflation forecast unchanged at 5.4 per cent for FY24 with Q3FY24 retail inflation coming in at 5.6 per cent and Q4FY24 at 5.2 per cent. This shows that the RBI believes that there is still a fair amount of uncertainty attached to the inflation trajectory due to recurring food price shocks and geopolitical risks, he said.

Therefore he believes that RBI is in a sweet spot whereby it is likely to use only the withdrawal of accommodation to ensure that inflation progressively aligns to the target rather than tinkering with the policy rate. This clearly means that the policy rate will remain unchanged at least in the foreseeable future, unless there is any adverse shock to the economy..

According to Dharmakirti Joshi, the chief economist at Crisil Ratings, although the repo rate has been left unchanged, there can be de facto tightening as RBI may continue to use liquidity compression as and when needed to speed up transmission and rely on macro prudential measures to manage risks to financial stability.

According to Madan Sabnavis, the chief economist at Bank of Baroda, though the policy does not have any surprise on the repo rate or stance, the major revision in GDP forecasts to 7 per cent is significant because we were getting contrary signals from the market on rural demand. Also, the higher inflation forecast means that it is unlikely that there can be a rate cut before August next.

Rahul Bajoria of Barclays India said the MPC maintained its relatively hawkish tone, citing risks to inflation from food and weather-related risks.

"On all counts, we found the policy bias to continue to be hawkish, but the extent of this hawkishness appears to have been dialled back, indicating comfort with the current period of high growth and manageable underlying inflation. We think this also signals no pressing need for RBI to change policy direction, as the economy appears to be in a Goldilocks environment, with the three bears of fragile global demand, tight global monetary conditions, and ongoing supply/commodity price shocks receding to the background," he said.

However, Rajani Sinha, the chief economist at Care Ratings feels that the governor had a lesser hawkish undertone compared to the October policy. He also indicated the RBI's comfort with the existing liquidity conditions.