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.
Near-term inflation uptick signals, but long-term projections remain stable.
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
Q1FY24 GDP falls short of projections, future growth outlook remains unchanged
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 tight liquidity signal spurs long-end yield surge
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.
India
Before MPC
After MPC
Change (In Bps)
10 Year G-sec
7.21%
7.36%
+15 bps
7 Year G-sec
7.25%
7.40%
+15 bps
5 Year G-sec
7.24%
7.42%
+18 bps
3 Year G-sec
7.26%
7.38%
+12 bps
Source: RBI, Fisdom Research
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