keep the pause in rate but change the stance

 Keep the ‘pause’ in policy rate but change the stance, please

The Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) meets in Mumbai from 5th June to 7th June 2024, to review the policy (repo) rate and the monetary policy stance. 

Policy Rate: While the external factors like forex reserves, rupee remaining in the range, no alarming current account deficit (CAD) are encouraging, RBI may still keep the policy rate unchanged due to the following domestic factors.

1. CPI Inflation for March and April 2024 came down below 5.0% and were at 4.85% and 4.83% respectively. However, food inflation spiralled in  April 2024. The monsoon is yet to set in aggressively. And the inflation, which came down by just 0.02% in April 2024 as compared to March 2024, is still much higher than the target inflation rate of 4.0%

2. In spite of keeping the policy rate unchanged in 2023-24, the GDP growth at 8.2% for the same period indicate that the economy is not impacted by the increase in policy rate and the consequent upward revisions in the lending rates.

3. RBI's moves to curb bank credit growth in select sectors like exposure to NBFCs and lending to retail sector, by increasing the risk weights on such exposures, do not appear to have had any impact so far on the lending spree to these segments.

4. Populist budgets, pushing up consumerism, cannot be ruled out in the scenario of the new government being formed with a coalition of parties, unlike the one party rule witnessed in the last 10 years.  This may push inflation, which is relatively subdued in the first five months of this year.

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". Though RBI may well decide to keep the stance unchanged, it will be worth debating on the following issues that warrant a rethinking to change the stance to 'Neutral'.

a. In the second fortnight of May 2024, Variable Rate Repo (VRR) was conducted three times in a space of four days injecting a liquidity of Rs.3.25 lac cr. (21st May 2024 to24th May 2024) in the banking system.

b. The net durable liquidity surplus had come down by half (from Rs.3.06 lac cr. in first week of Dec 23 to Rs.1.50 lac cr. in the third week of May 2024).

c. Rupee may remain volatile due to the changes in political equations within India. RBI's likely interventions in the market, to sustain the rupee within a range, might drain out the liquidity in the banking system further.

Regards

V. Viswanathan

5th June 2024

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