MPC should maintain status quo in repo rate and monetary stance

 Why MPC should keep repo rate and stance unchanged 

As we had seen in the minutes of the earlier Monetary Committee Meetings (MPC) of RBI, certain external and domestic factors influence the decision of MPC, while it reviews the policy rate and monetary policy stance. While FED fund rate, Current Account Deficit (CAD), average crude oil price, net FPI and NRI inflows/outflows are the major external factors taken up for discussion, CPI inflation, fiscal deficit, liquidity position and credit growth in the banking space and GDP are some of the domestic issues that get debated in the review meetings of CPC.

1. On the external front, though FED raised the fund rate by 25 bps, the statement from its Chairman that (i) consumer and labour market conditions are encouraging and (ii) there is no fear of recession now, even though the growth might be slower, has largely calmed down the international market. And  the fact that personal consumer expenditure (PCE) in US has declined from 6.8%, (same period last year) to 3.8% now, made experts to predict that the fund rate reached its peak or is near its peak, in the current rate hike cycle. Though FITCH reduced the country rating of USA from AAA to AA+ citing fiscal deterioration over the next three years, no significant spike in US bond yields since then, gives a lot of comfort.

2. FPI inflows to India remain positive with Rs.44000 cr. received in Q1FY24. NRI inflows (7.9 billion) with particular reference to FCNR deposit, receiving net inflow of USD 2.4 billion. in FY 2022-23 adds up to the liquidity in the banking system.

3. Crude oil averaging at USD 80 per barrel remains within the projection made by RBI in its monetary policy report

4. CAD is at a record low of 0.2% (USD 1.3 billion) in the last quarter of FY 2022-23

5. However Indian Rupee remains on the high side of Rs.82 per USD.

Internal Factors: 

1. While the external factors are proving positives, the increase of CPI inflation from 4.31% in May 23 to 4.81% in June 23 and the Fiscal Deficit in Q124 crossing 25% of the budget estimates (Last Year the same stood at 21% of estimates) are causes of worry, as to whether the current monetary policy initiatives will continue to bring the inflation control to the target levels by 2024. 

2. Bank credit growth continues to be strong at above two digit levels, even  at the current lending rates. The liquidity  in the banking space is positive touching Rs.1.53 lac cr. on 28th July 2023. Temporary liquidity mismatches of a few banks is met through issuance of CDs.

My views: Even with other things remaining positive, the temporary spike in CPI inflation and fiscal spends by the government in Q1 FY 24 calls for a cautionary approach on the part of MPC viz. to keep the repo rate unchanged. Similarly, neither excess nor short but adequate liquidity in the financial system requires continuance of MPC stance "Remaining focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth"

Regards

V. Viswanathan 

7th August 2023.

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