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Research Macroscope MPC Update Oct’23 – Pause With a Hawkish Echo

MPC Update Oct’23 – Pause With a Hawkish Echo

Written by - Fisdom Research

October 6, 2023 3 minutes

Key Highlights

Repo RateUnchanged at 6.50%
Policy StanceNo change in stance
Inflation Target4%
Economic FocusMacroeconomic stability and inclusive growth
InflationHeadline inflation surged in July-August due to food prices but is expected to ease. Core inflation is moderating.
GrowthDomestic economic activity is resilient, with strong domestic demand. Investment activity is robust.
LiquidityEfforts to manage excess liquidity include ending the incremental cash reserve ratio (I-CRR) and possible OMO-sales.
Financial StabilityIndian banking system is resilient with improved asset quality.
External SectorExports and imports have been contracting, but services exports are strong. Foreign exchange reserves are rising.
Additional MeasuresVarious measures introduced, including changes to prudential norms, extension of payment infrastructure development fund scheme, and more.
BottomlineCommitment to align inflation with the 4% target while supporting growth and maintaining financial stability.

Near-term inflation uptick signals, but long-term projections remain stable.

AspectInflation Outlook
Near-Term OutlookExpected improvement due to vegetable price correction and reduced LPG prices.
Future Trajectory FactorsLower area sown under pulses, dip in reservoir levels, El Niño conditions, and global energy and food price volatility.
Manufacturing FirmsExpect higher input cost pressures and marginally lower growth in selling prices in Q3 compared to the previous quarter.
Services and Infrastructure FirmsExpect a moderation in the growth of input costs and selling prices.

Source: RBI, Fisdom Research

Q1FY24 GDP falls short of projections, future growth outlook remains unchanged

AspectGrowth Outlook
Factors Supporting Domestic Demand
  • Sustained buoyancy in services
  • Rural demand revival
  • Optimism in consumer and business sentiment
  • The government’s focus on capital expenditure
  • Healthy financial conditions for banks and corporates.
Global Headwinds
  • Geopolitical tensions
  • Volatile financial markets
  • Energy price fluctuations
  • Climate-related shocks pose potential risks to growth.

Source: RBI, Fisdom Research

RBI’s tight liquidity signal spurs long-end yield surge

  • RBI’s primary concern is the excessive liquidity in the banking system and its potential impact on price and financial stability.
  • The introduction of the Incremental Cash Reserve Ratio (I-CRR) and its subsequent phase-out demonstrates RBI’s commitment to effective liquidity management.
  • RBI emphasizes the need for banks to proactively manage their liquidity, as seen in its encouragement for participation in 14-day variable rate reverse repo (VRRR) operations over parking funds in the SDF.
  • RBI’s readiness to consider Open Market Operation sales (OMO-sales) reflects its flexibility in using tools to align liquidity conditions with its monetary policy stance, aiming for a balanced and stable environment. OMO sales, to achieve this balance.
  • As a result of these measures, the impact on long-term yields has been more pronounced than on short-term yields.
IndiaBefore MPCAfter MPCChange (In Bps)
10 Year G-sec7.21%7.36%+15 bps
7 Year G-sec7.25%7.40%+15 bps
5 Year G-sec7.24%7.42%+18 bps
3 Year G-sec7.26%7.38%+12 bps

Source: RBI, Fisdom Research

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