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Below the Quote on RBI MPC By Esha Khanna, Assistant Professor at Sarla Anil Modi School of Economics (NMIMs)

 

 Even as two members continue to turn in favour of rate and stance change, RBI seems to be extremely vigilant and unwilling to make any changes primarily driven by discomfort arising from elevated food inflation and rising household inflationary expectations since September 2023. Though there is a considerable ease in core inflation, firmness in current policy stance is the need of the hour as higher share of food in consumption basket can have  a significant impact on inflationary expectations of businesses and households affecting further the wage demands and firms’ price setting behaviour which can change the course of overall inflation trajectory in the long-run. Going forward one cannot ignore the risk emanating from a dismal medium term growth outlook and ever increasing geopolitical tensions affecting external demand and may cause new supply-side disruptions. On the domestic liquidity front, transmission to lending rates (WALR) has been relatively  lower compared to deposit rates but stands  at 169 basis points for Public sector banks and 178 basis points for private sector banks but slowly increasing and can affect the domestic consumption depending on our interest elasticity of aggregate demand. Looking at the current liquidity scenario, RBI may continue to manage this tedious task of inflation-growth dynamics through its fine tuning liquidity management tools like VRR and VRRR auctions for little longer than expected without any change in policy rates. It would also be crucial to observe the anticipated easing of the monetary policy cycle by our global peers and its probable though likely positive impact on India’s forex reserves, FPI inflows and INR. If we remain divergent from global peers for a little while, RBI may look out for MSS and more OMO sales in near term to manage liquidity conditions. RBI’s emphasis on creating alternative investment avenues for bank retail customers, careful monitoring of retail loans and strict adherence required for  regulatory prescriptions relating to loan to value (LTV) ratio, risk weights and monitoring of end use of funds by Banks and NBFCs will contribute to strengthening the financial system.