MPC Vote on account

MPC is likely to vote on account!

Finance Minister Smt. Nirmala Sitharaman sprang a surprise by presenting a 'true Votes on account' Interim Budget to the Parliament on 1st February 2024. Even her predecessor, Shri Piyush Goyal came out with a 'sop' of DBT of Rs.6000 per year to farmers in his interim budget presented to Parliament, prior to 2019 elections. Honestly, I thought she might enhance the per annum to DBT to farmers to Rs.7500 from the present levels. Inflation and shortfall in rains in majority of the states would have come in handy to support such a step. But she chose otherwise. Congratulations to the FM for walking the talk she made.

Repo Rate: Taking a cue from FM, the MPC may well decide to continue the pause in repo rate for the sixth consecutive time. Though 

(i) comfortable forex reserves, (ii) rupee versus dollar continuing in the Rs.82- Rs.83 corridors, (iii) CAD  is down year on year, (iv) average crude oil prices remaining below USD 85 per barrel and (v) core retail inflation is below 4% (3.88% in Dec 23) 
favour a discussion to reduce repo rate by 25 bps, 

the MPC can always cite the reasons of (a) CPI inflation remaining much above the target level of 4% (at above 5.5% in Nov and Dec 23) and (b) uncertainty of paddy yields in the current season on account of shortfall in rain in most of the states  to keep the policy rate unchanged. The MPC is justified, if it keeps repo rate unchanged.

Monetary Policy Stance: One MPC member is on record for the nth time that the stance should be changed to 'neutral', as accommodation measures introduced in COVID times no longer exists. However he did not find agreement with the other members of the MPC who retained the stance as  "Remaining focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth". In fact, RBI went a step further and increased the risk weights on certain personal loans like unsecured, credit cards outstanding and loans to NBFCs, which carried A and above ratings, in order to curtail growth in such advances. 

Even though the CET 1 and CAR ratios of many public and private sector banks have come down sequentially during the quarter ended Dec 2023 due to the increase in credit weights on the said loans, the CD ratio of the banking system continues to be on the rise, as revealed by the following figures. 

                          Sep 2023    January 2024      (Rs. in lacs cr.)

Total Deposits        197              204

Gross Advances      155             164

CD ratio (%)             79              80

In the above circumstances, changing the stance to neutral might be interpreted that MPC favours growth over inflation control. Moreover, tight liquidity conditions is yet to pervade across the banking system, with some keeping excess in SDF and some resorting to MSF for their daily needs. Liquidity deficit, which reached a peak of Rs.3.5 lac cr. last month is now down to less than Rs.2 lac cr. Hence the monetary policy stance may also remain unchanged.

Regards

V.Viswanathan

6th February 2024.

Comments

  1. Ratan N V LFebruary 8, 2024 at 6:02 AM

    Well written. Reigning in inflation is of greater importance than growth

    ReplyDelete

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