Perspective on RBI MPC by Ms. Rajani Sinha, Chief Economist, CareEdge Ratings
Below the Perspective on RBI MPC by Ms. Rajani Sinha, Chief Economist, CareEdge Ratings
“The RBI’s MPC decision to hike the policy rate by 25-bps was in line with our expectations. The stance was changed to ‘calibrated tightening’ thereby ruling possibility of further rate cuts going ahead. The RBI’s upward revision of its FY27 growth projection by 40 bps to 7.1% was also broadly in line with our expectations, although we continue to expect growth to be marginally higher at 7.3% in FY27. At the same time, the Governor flagged concerns around second-round effects of higher inflation, rising inflationary expectations and price pressures becoming more broad-based. Deficient monsoons, supply chain disruptions, and elevated global commodity prices - including metals, food, and energy - are expected to keep price pressures elevated. Accordingly, the RBI also raised its inflation projection to 5.2%, slightly above our estimate of 5.0%.
Interestingly, the ‘calibrated tightening’ stance was last adopted by the MPC in October 2018 and was subsequently changed to ‘neutral’ in February 2019, alongside a 25-bps rate cut that marked the beginning of a policy-easing cycle. Notably, despite the adoption of a ‘calibrated tightening’ stance in October 2018, no further rate hike was undertaken back then. Given this historical precedent, along with the expected moderation in headline inflation from Q4 FY27 onwards, we continue to believe that the current hiking cycle will be shallow, with scope for another 25-50 bps of rate hikes going forward. Policy tightening should also provide support to the rupee, particularly against the backdrop of rate hikes by major global central banks.
Although the Governor did not provide explicit guidance on liquidity absorption, we believe the RBI is likely to maintain its focus on liquidity management. Rate hikes without corresponding liquidity tightening could prove less effective. In the coming days, a portion of the excess liquidity is also likely to be absorbed through higher festive-season currency demand, the maturity of the RBI’s short-dollar forward positions, and increased CRR accretion associated with deposit growth.
Request to consider the same.”
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