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Below The Perspective on MPC by Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Services

MPC minutes: Caution but no action ahead

(1) Cautious tone and stress on supply side

? The August MPC meeting minutes have cautious traces, but not ominous enough to change the narrative on net. The choice of policy flexibility, vigilance and focus on the durable elements of inflation dominated the minutes.

? Most of them admitted that RBI could not do much to influence transient perishables-led food shocks and food supply management, but it does add pressure to stay vigilant on domestic dynamics. To that extent, all of them stressed on the need to buckle up on the supply side policy management. 

(2) Divergence in MPC view on inflation risks

? Prof Goyal stressed that the fear of second round effect is unfounded at this point. She sees underlying core inflationary dynamics are likely to ease further (weaker wages ahead and no wage-price spiral or inching HH expectations and ongoing pass through of easing input cost).

? By contrast, Dr. Patra, argued that these food price disturbances could have a second round effect and un-anchor core inflation expectations.

? Dr. Ranjan, also sounded guarded of second round effect, albeit more balanced on inflation stance and noted that MPC’s prognosis of transiency of inflation in 2020-21 has in fact proved accurate.

*(3) Policy flexibility on stance*.

? On policy and stance outlook, Prof Goyal believes that despite higher inflation for the year (RBI 5.4%), the forward real policy rate is adequately tight, given uncertainties in both growth and inflation.

? Prof Varma also added current level of the repo rate is high enough to bring inflation towards middle of the band.

However, Internal MPC members mostly aligned more towards policy flexibility ahead.

(4) We see less pressure to renew I-CRR

? Gov. Das and Dr Patra focussed on liquidity management to support the inflation resolve. The System liquidity has finally turned into deficit after the ICRR move and tax outflows, which is pushing up overnight rates.

We think when the I-CRR measure will come for review again on 8th Sep, there will be less pressure on the RBI to renew this tool.

The routine quarterly advance measure tax outflows in Sep’23, the increase in CIC during the seasonal festive period of Sep-Dec’23, and concurrent state elections, will naturally deplete the liquidity balance.

(5) No action in FY24, Curve flattening to continue

? Our view: The minutes on net reflect the MPC’s vigilance on inflation but no urgency to act unless food inflation gets generalised.

We expect the food inflation shock will likely reverse meaningfully from Oct/Nov’23, leading to inflation falling more that of RBI’s 2H forecast.

? We maintain that the RBI will not hike/cut rates in FY24, and will not precede the Fed in any policy reversal in CY24.

? We reiterate our view that the G-Sec curve will remain flat, with the 10-yr yield reversing course by Sep-end towards 7.00-7.05%.

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