Prudent to keep policy rate and stance unchanged

It will be prudent to keep the policy rate and stance unchanged

The Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) meets in Mumbai from 3rd April to 5th April 2024, to review the policy (repo) rate and the monetary policy stance. There is positivity all around, as revealed by the following key factors, that are usually reviewed in the meetings of MPC:

External:

1. Forex Reserves increased by USD 64 billion since Mar 23 and the total reserves at USD 642 billion, incidentally, is the highest recorded so far.

2. FPIs injected net inflows of USD 25 billion in 2023-24.

3. Till Jan 24, the NRI inward remittances crossed USD 10.2 billion in FY 2023-24, nearly double the inflows, received in the corresponding period last year.

4. Current Account Deficit (CAD) narrowed down both in terms of percentage (1.2% of GDP) and amount (USD 10.2 billion ) in Q3 FY 24 as compared to Q2 FY 24 and Q3 FY 23.

5. Rupee continues in the range bound of Rs.82-Rs.83 per dollar and the average Brent crude oil continues to be below the RBI assumption of USD 85 per barrel, for calculating its inflation projection.

Internal:

1. Inflation for January and February 2024 at 5.10% and 5.09% are way below the peaks, which forced RBI to increase repo rate from 4.0% to 6.5% in a little over nine months period last year. Core inflation continues to fall and was at 3.3% in Feb 24.

2. The revised growth rate of 7 % for FY 2023-24 is likely to be achieved.

Even in the above scenario, RBI may still hold onto the same repo rate, since the CPI inflation is higher than the target level of 4%. and the Governor had indicated the determination of MPC, more than once, to bring down the inflation to less than target rate, before considering any reduction in the policy rate.

Monetary Policy Stance: In the last few reviews, MPC, by majority, kept the monetary policy stance as "Remaining focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth". There is no reason to review the stance, if one considers the following liquidity factors:

A. Growth in aggregate deposits for the current financial year is likely to be in excess of 12%, if the growth achieved till the first week of Mar 24 is any indication.

B. Though Variable Repo Rate (VRR) auction was subscribed to by the banks for an amount aggregating Rs.1.65 lac cr., in the second fortnight of Mar 24, net absorption by the RBI in its SDF account continues for a majority number of days in the month. 

C. The market repo, tripartite repo and average call money rate are midway between the repo and MSF rates, indicating availability of funds at less than heated costs.

D. Banks are able to raise retail and bulk (including CDs) at more or less the same price in the last 3-4 months.

E. Market price of G-Secs at a comfortable level over the issue prices, indicate that liquidity deficit of a few banks have not yet turned them into ‘desperation mood’ to raise money for their CRR or lending needs.

F. Any change in monetary stance might be alleged as a breach of code of conduct, since the general elections for the Lok Sabha is already announced.

So, prudence requires no change in repo rate and monetary policy stance. Good luck MPC.

Regards

V. Viswanathan

2nd April 2024