RBI has its eye on inflation

It was taken for granted that the MPC’s decision would be to pause the repurchase rate action. In fact, the governor’s speech on Thursday had no surprising elements, and that’s a good suggestion, because it suggests that despite headwinds and global uncertainties, it’s still quiet at home.

The GDP forecast remained unchanged at 6.5 percent with the inflation forecast lowered to 5.1 percent for FY24 which is substantially positive, underscoring domestic resilience. Flows from abroad, whether in stock markets or direct investments, have entered the green spots after a long time, and this reinforces conviction about the country’s future in the medium term.

However, despite these positives, it was a very measured comment from RBI Governor Shaktikanta Das, as inflation continues to behave like an uncontrolled child. “We need to keep Arjuna’s eye on inflation,” said Das. There are two ways to tame this baby. Either calibrate the buyback rate or curb liquidity. Presumably, with interest rates up 250 basis points since May 2022, the first option is almost fully explored at the moment. According to Das, it is starting to show the desired results. So far, the RBI has turned to liquidity management to keep inflation in check.

The series of Variable Repo Rate (VRR) and Variable Reverse Repo (VRRR) auctions in recent months has been a regulatory action adopted for this purpose. An interesting conclusion from these exercises was that banks prefer to rely on the regulator for liquidity, but they don’t want to stop funds with the RBI at this point. On the one hand, the regulator wants banks to build their own liquidity channels (mainly deposits), and not rely too much on the system for liquidity.

This is an interesting tug of war. While core inflation is within the comfort zone of 4-6 percent, real inflation breaches this range. For this to be achieved, a mixture of discretionary and non-discretionary spending must be curbed. The composition of bank loan growth indicates that a lot of short-term borrowing to individuals is conducive to credit recovery. For banks, this demand can be met through short-term liquidity; She does not have to count on 2-3 years deposits and so on.

Discomfort from RBi

The regulator has expressed its unease with the rising rate for such a short (often not guaranteed) term, and unless this trend starts to cool off a bit, it can be difficult to keep a tab on true inflation. The question is how comfortable and for how long will the regulator support liquidity? In particular, if the funds are not used to create assets or wealth.

This explains why the governor is so focused on inflation, more so than previous MPC speeches. So while the long pause on buybacks seems almost a foregone conclusion, attention is clearly turning to liquidity. Will the ₹ 1.7-lakh crores surplus be maintained?

Meeting Ashala Jethmalani, Economist, RBL Bank at the Monetary Policy Committee meeting

Rajani Sinha, Chief Economist, CareEdge

Mitul Shah, Head of Research, Reliance Securities