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Below the RBI`s Monetary Policy Outlook by Mr. Vivek Goel, Joint Managing Director, Tailwind Financial Services

"India's fiscal prudence and economic stability in the post-Covid era, coupled with a robust vaccine administration, have provided crucial support to monetary policy amid a challenging global backdrop. Despite an initial sense of control over inflation, which was within the targeted 6% band, recent months have witnessed pressure from a surge in food inflation, though this appears to have moderated with the August CPI registering at 6.83%. Furthermore, the core CPI remains comfortably below 5%.

While policymakers welcomed this development, they remain vigilant against potential negative surprises. These include the impact of crude oil price fluctuations resulting from OPEC+ production cuts, potential effects on certain food items due to uneven monsoon distribution, and the impact on imported items due to El Nino.

In line with expectations, the Monetary Policy Committee (MPC) announced a decision to maintain the repo rate at a pause and a stance of continuing accommodation withdrawal. Looking ahead, global monetary policy will play a crucial role, especially as US Federal Reserve policy expectations have shifted towards a delayed rate cut compared to earlier projections. The US rates, now above 5%, are narrowing the gap with the Indian repo rate at 6.5%, which has affected private transfers by attracting USD savings rates after an extended period. However, some of this impact is anticipated to be mitigated by the inclusion of Indian bonds in global indices, thereby limiting the impact on reserves.

Additionally, the RBI's CPI forecast for Q1FY25 at 5.2%, coupled with the Governor's emphasis on the target level of 4% rather than the 6% band, is seen as a hawkish message, aligning with the stance of 'higher for longer.' In immediate response to this, 10Y G-sec yields experienced an upward surge as bond markets adjusted to this commentary. MPC's August policy minutes had already indicated policymakers' vigilance regarding the impact of excess liquidity on inflation. Consequently, they have announced the possibility of OMO sales as a liquidity-tightening measure as and when required."

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