The MPC’s policy was broadly in-line with expectations.

Looking at the fineprint, the RBI’s guidance continues to signal that the environment remains uncertain and their fight against inflation is far from over. This could have been seen as hawkish if it was not for the mention of the risk of overtightening in the Governors’ speech.

The mention of risk of overtightening — for the first time — has partly offset the hawkishness of the underlying inflationary concerns otherwise. This balanced approach has cemented the case for our call for pause on policy rate at least through 1HCY2024 and has moved a step forward towards diluting the stance away from ‘withdrawal of accommodation’ over the next few policies (although earliest possibility is not before 1QFY25).

The Repo rate has been retained at 6.5 per cent (and the policy stance has, however, stayed at ‘withdrawal of accommodation’). The MPC has re-emphasised its focus on 4 per cent inflation target. On the growth front, the RBI was expected to revise upward the FY2024 GDP growth. However, it surprised with a much higher number (7 per cent compared to our estimates of 6.8 per cent).

Further, the RBI has retained the FY2024 inflation estimates at 5.4 per cent (same as Kotak’s), while highlighting the upside risks to inflation outlook emanating from food inflation, crude oil prices and uncertain global environment.

Liquidity management

While the next few policies would see a status quo on rates and stance, we see periodic actions by the RBI on managing its stance through liquidity tools.

While markets have drawn some comfort from absence of primary OMO sales until now, we do not entirely rule out the possibility of such actions in the months ahead.

Although in the near term, the liquidity conditions are expected to remain tight amidst advance tax and GST related outflows, 4QFY24 should see improvement in liquidity amidst possible surge in FPI flows (being absorbed through FX intervention) and continued government spending.

The magnitude of these flows would increase the risk of OMO sales once again, weighing on bond market sentiments. Interesting would be to witness, if the RBI will be ready to let liquidity conditions ease (by how much and by when) which could soften the overnight rates towards the Repo rate from currently around upper-end of the LAF corridor. This, if materialises, could offset the stealth tightening of about 25bps witnessed since mid-September 2023.

Besides the domestic factors, RBI’s decisions on overnight rates and hence liquidity management will remain driven by global turn of events.

Global scenario benign

The international environment has turned fairly benign since the October 2023 policy. The sentiments have shifted towards the markets’ pricing in 125-150bps of rate cuts by the Fed and ECB in 2024 respectively, as inflation remains on a downtrend while growth indicators continue to disappoint. The 10-year yield differential between India and US have increased from 250bps during the October policy to 310bps currently.

Crude oil prices too have fallen by 8 per cent.

Another important leaf from recent announcements from RBI has been the regulatory tightening of lending standards. The RBI’s increase in the risk weight on unsecured consumer credit for banks and NBFCs last month followed by the recent announcement for a new framework on connected lending for better credit management suggest RBI’s proactive vigilant behaviour in-order to ring fence any potential bubbles.

Overall, while the policy rate actions will stay elevated but for now, we expect RBI to continue to monitor any potential risks on macroeconomic and financial stability and hence be prompt in acting through macro prudential measures, as deemed necessary.

The writer is Chief Economist, Kotak Mahindra Bank. Views are personal