Mumbai, Oct 06 (ANI): Reserve Bank of India (RBI) Governor Shaktikanta Das addresses the press conference after monetary policy review meeting, in Mumbai on Friday. (ANI Photo)
| Photo Credit: ANI
The Reserve Bank of India (RBI) continues to keep its fingers on the ‘pause’ button, maintaining key benchmark rates at 6.50% and a hawkish stance amid rising inflationary pressures and stable economic growth. The need to keep adequate liquidity in the system, in line with its monetary stance, has become the third factor that it now needs to keep an eye on.
The detailing of all ongoing and likely inflationary trends with a categoric emphasis that its inflation target is 4% and not 2 to 6% ‘on a durable basis while supporting growth’ amply explains the galactic task ahead for the central bank. Despite vegetable prices receding from July-August highs, the core inflation still remains on the higher side, owing to price pressures in cereals, pulses, and spices.
Though core inflation softened to 4.9% in this period, monsoon deficiency may take a toll on Kharif crops and low reservoir levels could also impact Rabi sowing. As we approach an election year, food and fuel inflation may be contained for at least 2-3 quarters. However, factors like El Niño and potential spikes in short-term crops – like onions as singled out by the Governor – and uncertain crude prices may continue to keep inflation elevated. Given this brittle outlook, one may feel that CPI inflation, projected at 5.4% for 2023-24, is a little ambitious.
This is because fluid global financial and geopolitical conditions have become another key piece in our inflation jigsaw, forcing the markets to reprice the impact, for a longer time frame. The volatility is going to come from higher crude, U.S. dollar, equity markets and general food inflation. The U.S. consumer prices were up in August at 3.7% against 3.2% in July due to rising food, fuel and rental costs. Further spikes would force the U.S. Fed to go for more hikes in the coming months. The Governor has acknowledged that even though many central banks are signaling a peaking of their rate hike cycle, a tight monetary policy stance could persist for a very long period. From here on, an upside would be the plausible route.
For us, our stable growth, seen at 6.5% for FY24, remains a soothing element. We have a few economic cylinders firing right such as strong domestic consumption, sustained agricultural activity, improving industrial sector and a growing manufacturing sector, supported by key sectors such as pharmaceuticals, basic metals, cement, motor vehicles, and food products. Services sector is maintaining the momentum, and PMI Services are expanding strongly. Government capex continues to roll out overall investment activity while private sector capex is gaining ground. As a key indicator, the capacity utilisation is up.
Now comes the third crucial element: the RBI’s eagerness to remove excess liquidity. The prod to reassess the liquidity requirements of banks with a follow-up advice that the central bank may resort to OMO sales to align liquidity levels to its monetary stance underlines the aspect that it is concerned about the “skewed liquidity distribution” which could pose risks to price and financial stability.
Today was more about analysis and maintaining status quo than action. As India prepares for the festive season ahead, the RBI wants to ensure that there is appropriate liquidity to support consumption growth while maintaining a hawk’s eye on inflation. Hence, although how the various macro-economic data pans out over the next couple of months will be keenly watched, the RBI’s estimates for inflation at 5% plus levels for the next few quarters may not provide the them much room to change their “withdrawal of accommodation” policy stance for some time.
(The writer is President and Head – Commercial Banking, Kotak Mahindra Bank Ltd.)