RBI Monetary Policy Committee (MPC) Meeting Highlights December 2023

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India’s growth resilience beat expectations. Developments since the Oct’23 policy meet suggest the domestic economy is going strong. The latest GDP growth (7.6%) exceeded consensus (6.8%) and our expectations (6.9%), primarily driven by investments while consumption growth was tepid. We reckon the coming period will see a reversal in the contributors to growth, from investment to consumption, as competitive populism would shift the focus of government spending from capital to revenue expenditure, while private investments are likely to be subdued ahead of the general elections. 

Global growth slowing; soft landing for the US now a possibility. Heading toward end-2023, global growth is clearly decelerating. Amid such uncertainty, the case for a soft landing for the US has improved, where growth is relatively strong, easing labour markets and core inflation moderating. This has helped yields sliding and DXY easing, leading to FPI flows in Nov’23 turning positive. 

Core inflation well on track; volatile food prices a concern. Headline inflation has been tracking downward, with core inflation in Oct’23 shrinking for the fourth straight month. Active supply-side measures and no change in fuel prices at the pump ensured headline was well in control. Ahead, we think some of this moderation will be un-done with food prices again rising and lower reservoir levels affecting the rabi output in 2024. 

Liquidity in deficit. While the governor at the last meeting highlighted the possibility of OMO sales, liquidity has been in deficit through Nov, with overnight rates hovering around the MSF. 

RBI to continue its pause. Taken together, as inflation is still a concern and growth strong, the RBI will pause, letting rate hikes work their way through the system. With liquidity in deficit, there is no need for OMO sales although the RBI would rely on active liquidity management. We will be watching out for the Governor’s commentary on adjusted risk weights and retail credit portfolio. While we expect no change in the liquidity stance, the commentary is likely to be neutral.