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Below On RBI MPC announcement By Mr. Piyush Baranwal, Sr. Fund Manager, WhiteOak Capital Asset Management Ltd

“In their monetary policy meeting concluded today, MPC members voted unanimously to keep the repo rate on hold at 6.50% while retaining their stance of ‘withdrawal of accommodation’. RBI projected CPI to be at 5.2% for FY24, with risks evenly balanced on both sides. Governor Das in his post-policy comments reemphasised on RBI’s CPI target of 4% and clarified that today’s action should be seen as a pause, not a pivot. This keeps the door open for further policy actions if warranted while also preventing financial conditions from easing prematurely thus hampering their fight against inflation. Given that overnight rate has risen by approximately 320 bps over the past year, RBI likely wants to better assess the lagged impact of past monetary tightening measures before acting any further, thus avoiding over-tightening risk.

After today’s pause in rate hike cycle, we believe that bar for future rate hikes has moved higher and we may be in for a prolonged pause phase. If CPI does trend in line with RBI’s projection of 5.2% in FY24, repo rate at 6.5% creates sufficiently positive real rate, which when coupled with steady contraction of systemic liquidity should provide necessary disinflationary force for CPI to move towards RBI’s target. Key risks in our view of extended pause are 1) continued negative surprise on CPI; and 2) elevated pressure on INR on account of Fed tightening, weakening of capital flows etc.”

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