The pitch is improving. RBI will play defensive role due to fall in crude oil, weakening rupee, low US yields

 The pitch is improving. RBI will play defensive role due to fall in crude oil, weakening rupee, low US yields

The pitch is improving. RBI will play defensive role due to fall in crude oil, weakening rupee, low US yields

The RBI MPC is expected to maintain status quo on key rates with a fifth consecutive pause when it shares the results of the MPC meeting on December 8. RBI may continue to defend the wicket given the softening of crude oil prices, weakening of the Indian Rupee and decline in long-term US yields. ,

The meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) began on December 6 to review the country's monetary policy. The MPC's decision will be announced on December 8. The MPC is expected to maintain status quo on both key rates and its stance while sharing the outcome of the meeting. The benchmark policy repo rate is currently at 6.50 per cent with a “return to housing” stance. The MPC kept policy rates unchanged for the fourth consecutive time in its last monetary policy meeting.

In the latest data released, India's GDP growth positively surprised at 7.6 per cent year-on-year in Q2FY24, beating RBI's estimate for the quarter by 110 bps. This was supported by strong growth in the manufacturing sector in the second quarter, making India the fastest growing major economy in the world. Further, since the last MPC meeting, consumer price index (CPI) inflation has declined to a four-month low of 4.87 per cent in October 2023 due to favorable base effect, improvement in vegetable prices and a recent decline in consumer price index (CPI) inflation in September 2023. Was 5.02 percent. Prices of Liquefied Petroleum Gas (LPG) or LPG.

Although CPI inflation remained within the RBI's tolerance range of 2-6 per cent for the second consecutive month, it was above the RBI's estimate of 4 per cent.

“We are not out of the woods yet and we have miles to go, but the readings of about 5 per cent and 4.9 per cent in September and October respectively, are a welcome relief from an average of 6.7 per cent in 2022-23 and 7.1 per cent in July . -August 2023,” the November 2023 RBI bulletin said.

The next two inflation readings (November and December 2023) could be closer to 6 per cent due to higher food inflation, lower sown area under pulses, declining reservoir levels, El Nino conditions and volatile global energy prices. Amidst all this, the decline in core inflation is a ray of hope.

In October 2023, core inflation, which excludes volatile food and fuel prices, had fallen to around 4.2 per cent, compared to 4.5 per cent in September 2023. Even if the RBI gets relief from moderation in core inflation, it will remain cautious as the fundamental goal of the RBI is. CPI inflation is to be aligned with the 4 per cent target on a sustainable basis.

Although crude oil prices have recovered and are trending lower, they remain volatile. A point of caution for the RBI will be rupee weakening as the Indian rupee closed at an all-time low of 83.39 against the US dollar on December 5, 2023. Overall liquidity remains tight and liquidity remains largely in deficit. In the last two months, the deficit has exceeded ~₹1,00,000 lakh crore for some days. RBI announced in its October 2023 policy that it may consider OMO-sales (open market operations sales) to manage liquidity depending on the emerging liquidity conditions. Given the liquidity crunch scenario, OMO-sales may not happen in the near term.

On the global front, all three major central banks – the US Federal Reserve, the Bank of England and the European Central Bank – have kept rates unchanged/left interest rates unchanged in their latest policy decisions, though they indicated that the policy ' Will remain strict till 'extended'. Duration'. In the latest data, euro zone inflation eased to 2.4 percent in November 2023 from above 10 percent a year ago after 10 consecutive rate hikes, making further rate hikes unlikely.

In the US, markets are considering a rate cut faster than the central bank had predicted. The manner in which long-term US Treasury yields have declined appears to be at odds with the expectations of the central bank and the market. This has put the RBI in a difficult position making it complicated for the RBI to balance all this. Geopolitical tensions remain due to the ongoing war in Ukraine and the Israel-Hamas conflict.

In the above backdrop, we are expecting no change in the policy rate and stance. The main thing to watch will be commentary/action around inflation expectations and liquidity management. Although there is relief from stable core inflation, the RBI will remain cautious about the impact of elevated food inflation on inflation expectations. We believe the rate hike cycle has probably peaked and the next policy move is expected to be a rate cut in CY24.