Market experts anticipate that the Reserve Bank of India (RBI), under the leadership of Governor Shaktikanta Das, will unveil its fourth monetary policy decision for fiscal 2023-24 today. Following a two-day review, the central bank is widely expected to maintain its current interest rates, supported by easing inflation figures and a commitment to its hawkish policy stance.

Most economists concur that the RBI will maintain the key repo rate at its existing level of 6.50%, with only a minority suggesting a 25 basis point hike. The central bank’s stance, characterized by the ‘withdrawal of accommodation,’ is not anticipated to change. However, the recent increase in global crude oil prices will likely prompt the Monetary Policy Committee (MPC) to remain vigilant about India’s inflation outlook in the coming quarters.

Inflation and Liquidity Management Remain Key Focus for MPC

The prevailing narrative guiding the central bank’s rate-setting panel continues to prioritize inflation and liquidity management. In terms of inflation, the near-term outlook leans toward a significant correction, though concerns persist about structural price stability in non-perishable food items. Additionally, apprehensions regarding rising input costs due to crude oil and the potential depreciation of the Indian Rupee may pose threats to core inflation in the future.

India’s Consumer Price Index (CPI)-based inflation surged to 7.8% in July, primarily due to increased food prices, but subsequently eased to 6.8% in August. As a result, the RBI revised its retail inflation projections for 2023-24 upward to 5.4%, up from the 5.1% projection made in its previous monetary policy meeting in June.

Focus on Liquidity Measures

Regarding liquidity, the RBI has recently initiated liquidity-draining measures through short-term forex swaps and secondary market Open Market Operations (OMO) sales, aiming to tighten monetary conditions and elevate overnight rates above the repo rate. The continuation of these ad hoc measures or the announcement of a more enduring liquidity-draining policy remains uncertain.

Outlook on Economic Growth

India’s economic landscape presents a mixed picture. While high-end consumption and government capital expenditure are robust, lower-end domestic demand and exports remain subdued. Furthermore, statistical buoyancy in real Gross Domestic Product (GDP) could recede in Q2FY24, influenced by the diminishing Wholesale Price Index (WPI) deflation and challenges posed by worsening terms of trade during the quarter.

Anticipating the lagged effects of previous tightening measures and a further weakening global economy, economic growth in India is expected to decelerate in the coming period. This outlook follows a notable 7.8% growth in the April-June quarter, attributed to a resilient services sector and strong demand.

Concluding Thoughts

As RBI Governor Shaktikanta Das prepares to announce the monetary policy decision, all eyes are on the central bank’s approach to maintain stability amidst evolving economic conditions.

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