Second MPC Meeting for FY24 sees RBI’s prudent approach in the face of diverse global factors
In its highly anticipated second Monetary Policy Committee (MPC) meeting for FY24, the Reserve Bank of India (RBI) opted to keep the policy repo rate unchanged at 6.5 per cent. The decision to maintain rates was unanimous, with the focus on preserving the stance of “withdrawal of accommodation,” supported by a 5:1 majority vote within the MPC. This move comes in light of the RBI’s observations of global uncertainties and inflationary pressures being higher than central banks’ targets.
While the policy announcement aligns with expectations, it is worth noting the 10 basis point increase in the 10-year benchmark rate, reaching 7 per cent. This uptick was largely influenced by a surprising rate hike of 10 basis points by the Bank of Canada, causing a 10-year U.S. Treasury (UST) spike.
Amidst these developments, the Indian economy maintains a robust GDP outlook, with an overall growth projection of 6.5 per cent for FY2024. Economic activity continues to display strength, buoyed by high-frequency indicators reflecting robust consumer confidence and positive business sentiment. These favorable conditions foster a conducive environment for the capital expenditure (capex) cycle in the fiscal year 2023-24. Furthermore, risks appear balanced overall, further instilling confidence in the economic trajectory.
In terms of inflation, the RBI has slightly revised down the projection for headline Consumer Price Index (CPI) in FY24 by 10 basis points to 5.10 per cent. Notably, easing has been observed across various categories, and with anticipated stable fuel prices and a normal monsoon, the improved output from the Rabi crop is expected to help maintain benign inflation levels.
Recently, the RBI made the decision to withdraw Rs 2,000 denomination notes from circulation, amounting to an outstanding value of Rs 3.62 lakh crore, equivalent to about 10.8 per cent of the currency in circulation. Moreover, the RBI has approved an Rs 87,416 crore dividend payout to the central government for FY23, exceeding the budgeted amount. Consequently, banking system liquidity has eased to comfortable levels due to a decline in currency circulation, increased government spending, and the RBI’s efforts to rebuild foreign exchange reserves over the past few months. The central bank will continue to actively manage liquidity on a day-to-day basis.
While the RBI acknowledges the persistence of global uncertainties, particularly with inflation exceeding central banks’ targets, it highlights the rate hikes by central banks such as the Bank of Australia and the Bank of Canada, which remain distant from a neutral stance. The decision of the Federal Open Market Committee (FOMC) regarding the target rate remains uncertain, leaving the future path of rates open to speculation.
Overall, the RBI’s policy announcement demonstrates a well-crafted approach, considering the diverse global factors in play. The central bank continues to emphasize its commitment to containing inflation and achieving the 4 per cent target. With a favorable long-term inflation outlook, the RBI appears comfortable with the current flat yield curve. India’s macroeconomic situation is deemed favorable, allowing the RBI to tread cautiously on the current path. The change of stance to neutral for at least one more policy suggests that yields may move sideways with a downward bias. As the RBI navigates the ever-evolving economic landscape, it remains poised to respond appropriately to future developments.
