MPC Update Oct’23 – Pause With a Hawkish Echo

Written by - Fisdom Research

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October 6, 2023 3 minutes

Key Highlights

Aspect	Announcement
Repo Rate	Unchanged at 6.50%
Policy Stance	No change in stance
Inflation Target	4%
Economic Focus	Macroeconomic stability and inclusive growth
Inflation	Headline inflation surged in July-August due to food prices but is expected to ease. Core inflation is moderating.
Growth	Domestic economic activity is resilient, with strong domestic demand. Investment activity is robust.
Liquidity	Efforts to manage excess liquidity include ending the incremental cash reserve ratio (I-CRR) and possible OMO-sales.
Financial Stability	Indian banking system is resilient with improved asset quality.
External Sector	Exports and imports have been contracting, but services exports are strong. Foreign exchange reserves are rising.
Additional Measures	Various measures introduced, including changes to prudential norms, extension of payment infrastructure development fund scheme, and more.
Bottomline	Commitment to align inflation with the 4% target while supporting growth and maintaining financial stability.

Aspect	Inflation Outlook
Near-Term Outlook	Expected improvement due to vegetable price correction and reduced LPG prices.
Future Trajectory Factors	Lower area sown under pulses, dip in reservoir levels, El Niño conditions, and global energy and food price volatility.
Manufacturing Firms	Expect higher input cost pressures and marginally lower growth in selling prices in Q3 compared to the previous quarter.
Services and Infrastructure Firms	Expect a moderation in the growth of input costs and selling prices.

Source: RBI, Fisdom Research

Aspect	Growth Outlook
Factors Supporting Domestic Demand	Sustained buoyancy in services Rural demand revival Optimism in consumer and business sentiment The government’s focus on capital expenditure Healthy financial conditions for banks and corporates.




Global Headwinds	Geopolitical tensions Volatile financial markets Energy price fluctuations Climate-related shocks pose potential risks to growth.

Source: RBI, Fisdom Research

RBI’s primary concern is the excessive liquidity in the banking system and its potential impact on price and financial stability.
The introduction of the Incremental Cash Reserve Ratio (I-CRR) and its subsequent phase-out demonstrates RBI’s commitment to effective liquidity management.
RBI emphasizes the need for banks to proactively manage their liquidity, as seen in its encouragement for participation in 14-day variable rate reverse repo (VRRR) operations over parking funds in the SDF.
RBI’s readiness to consider Open Market Operation sales (OMO-sales) reflects its flexibility in using tools to align liquidity conditions with its monetary policy stance, aiming for a balanced and stable environment. OMO sales, to achieve this balance.
As a result of these measures, the impact on long-term yields has been more pronounced than on short-term yields.

Source: RBI, Fisdom Research