NE BUSINESS BUREAU
CHENNAI/BENGALURU, AUG 15
The Reserve Bank’s recent decision to maintain the status quo on policy rate will support growth and keep inflation under check, said industry experts.
Highlights of the Monetary Policy announcement today by Governor Shri Shaktikanta Das. @DasShaktikanta #rbi #rbitoday #rbigovernor #rbipolicy #monetarypolicy #rbimonetarypolicy #shaktikantadas pic.twitter.com/VqKYgqAquJ
— ReserveBankOfIndia (@RBI) August 10, 2023
The Reserve Bank of India (RBI) left its key policy rates unchanged for a third straight meeting but signalled tighter policy if food prices drive inflation higher.
The monetary policy committee (MPC), which has three members from the central bank and a similar number of external members, held the benchmark repurchase rate (repo) at 6.50 per cent in a unanimous decision.
- I don’t believe it will have any major impact on credit growth: Vineet Agarwal, co-founder, Jiraaf
- RBI has sensitized the market about possibility where this sustains and get generalized which may then warrant additional action: Mahendra Jajoo, CIO – Fixed Income, Mirae Investment Managers
- Anchoring of inflation may have led to measures like incremental cash reserve ratio: Prashant Pimple, Chief Investment Officer – Fixed Income Baroda BNP Paribas Mutual Fund
- RBI’s decision aligns with expectations in this dynamic economic environment: Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund
- RBI’s unwavering focus on nurturing economic growth remains steadfast while maintaining smooth liquidity: Seema Prem – CEO and Co-founder at FIA Global
Reacting to the RBI’s decision, Vineet Agarwal, co-founder, Jiraaf, said,
“RBI stated that ICRR (Incremental Cash Reserve Ratio) was increased to 10% considering excess liquidity in the system, which means that banks have enough liquidity to meet the current credit demand.
So, I don’t believe it will have any major impact on credit growth. It should be noted that the regular CRR (Cash Reserve Ratio) required for banks remains unchanged.”
Nikunj Agarwal, Head Debt & Lending Alliances, Propelld said, “The recent decision by the Reserve Bank of India (RBI) to raise the Incremental Cash Reserve Ratio (ICRR) came as a bit of a surprise considering the current market conditions.
The potential consequences of this action could reduce liquidity circulation within the market, resulting in a more stringent ratio for banks.
However, we expect minimal impact on major Fintech/NBFC borrowing programs. Additionally, a slight increase in the deposit base is foreseen. The increase in ICRR is intended as a temporary measure to manage liquidity until the onset of the fiscal year’s third-quarter festive business season, helping the RBI anticipate and address heightened economic activity.”
Commenting on RBI’s decision, Mahendra Jajoo, CIO – Fixed Income, Mirae Investment Managers (India) Pvt. Ltd., said that MPC decided to keep key policy rates unchanged, notwithstanding expectation of a sharp spike in headline inflation in coming months due to a recent rise in vegetable prices, considering it to be a rather transient situation imparting high degree of volatility to headline prints without having much lasting impact on core inflation which has shown a moderating trend in last few prints. However, RBI has sensitized the market about possibility where this sustains and get generalized which may then warrant additional action. Inflation projections for FY 24 have been revised upwards marginally by 30bps to 5.40%. MPC also indicated alignment with the “higher for longer” rates scenario, currently the prevalent global rate outlook, given that inflation continues to remain well above target in a large section of developed markets. This sets up for a rather longish pause on rates for now and tilting the balance slightly further towards possibility for further hikes (though the threshold for such action remains very high). Growth projections remain unchanged at 6.50% for FY24.
“Further, to better align calibration of money market rates with policy rates, RBI imposed an incremental CRR of 10% on increase in net demand and time liabilities (NDTL) for Banks between May 19, 2023 and July 28, 2023. This is guided to temporary and will be reviewed before Sep 8’23,” Jajoo added.
Prashant Pimple, Chief Investment Officer – Fixed Income Baroda BNP Paribas Mutual Fund opined anchoring of inflation may have led to measures like incremental cash reserve ratio.
“As expected, RBI kept its key rate unchanged at 6.50% and retained its stance of withdrawal of accommodation to ensure inflation remains within 4% target band. All 6 members of the Monetary Policy Committee (MPC) decided to hold rate steady keeping in mind the growth inflation dynamics and liquidity situation. After a series of hikes till Feb 2023 RBI has held on to the current rate to support onshore growth and is expected to hold rates longer given the evolving inflation situation and Global monetary actions.
Temporarily, RBI decided to hike Incremental CRR (ICRR) of 10% for a period till Sep 2023 to address surplus liquidity generated by various factors including return of Rs 2000 Notes to the banking system. This measure was over and above the daily measure like variable repo rate (VRR) and variable reverse repo rate (VRRR) auction RBI had been conducting till now to address any liquidity issue.”
Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund said the RBI’s decision aligns with expectations in this dynamic economic environment.
“RBI stays on hold while indicating its discomfort with the level of surplus liquidity as it surprisingly announces an incremental CRR (I-CRR) of 10% on the increase in Bank’s NDTL between May19, 2023 and July 28, 2023. We expect short term money market curve of up to 3-6 months maturity to be negatively impacted. We expect the curve to stay flat and the 10yr Benchmark Bond to trade in a range of 7.05% to 7.25% over the next couple of months”.
Giving perspective on RBI MPC decision, Seema Prem – CEO and Co-founder at FIA Global, said the RBI’s unwavering focus on nurturing economic growth remains steadfast while maintaining smooth liquidity.
“In its latest monetary policy meeting, the Reserve Bank of India (RBI) has finely calibrated its stance of ‘withdrawal of accommodation’. While RBI has revised its Consumer price inflation (CPI) projection for FY24 at 5.4%, it has reiterated that “bringing headline inflation within the tolerance band is not enough; we need to remain firmly focused on aligning inflation to the target of 4.0%.
In its delicate balancing act, the RBI’s unwavering focus on nurturing economic growth remains steadfast while maintaining smooth liquidity. The rural credit sector, a pivotal growth engine, has witnessed a commendable 11.3% year-on-year expansion in the April-June quarter of 2023. However, we expect the stance may reverse soon to enable further push to much-needed rural credit, given the festive season ahead.”
Incidentally, the RBI raised its inflation forecast for the current financial year ending March 2024 to 5.4 per cent from 5.1 per cent earlier, citing pressures from food prices. In the July-September quarter, it saw inflation at 6.2 per cent, significantly higher than the 5.2 per cent earlier forecast.
