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December MPC Review

08-Dec-2023

The MPC struck a fine balance maintaining a status quo and not disrupting the markets, despite growth impulses being strong and inflation concerns still playing out at large. The policy repo rate has been maintained at a unanimous 6.5 per cent and the stance as “withdrawal of accommodation” with 5:1 voting.  As expected, RBI Governor in his speech, highlighted the stronger than expected Q2 real GDP growth and painted a positive outlook for growth. On inflation, the emphasis was on repeated food inflation shocks and the risk they pose to the current disinflation process. From bond market’s perspective, there were no announcement on liquidity tightening measures through OMO sales and the RBI Governor stated that the liquidity tightness prevalent during the second quarter, did not warrant OMO sales considerations. Overall, the policy announcement looks likely to have made it clear that the policy rates will be maintained at the current levels if the economy continues to remain in a goldilocks kind of a situation going forward, with growth going strong and inflation progressing lower gradually.

Growth & Inflation Projections

The real GDP growth forecast for FY 2023-24 has been revised upwards sharply to 7 per cent as against October policy projection of 6.5 per cent. However, RBI kept the CPI projections unchanged at 5.4 per cent for FY 2023- 24. Further, in order to address the skewed usage of MSF and SDF window by the banking system, RBI has allowed reversal of SDF and MSF during weekends and public holidays from 30th Dec onwards in order to facilitate improved funds management by banks.

Conclusion

The key takeaway from the policy was that RBI in the face of strong growth impulses and food price uncertainty, is unlikely to make a move on policy rates soon, in either direction. The concluding remarks of the Governor do well to support this view, that the policy actions have to be very well thought out at the current juncture and that the central banks should not be carried away by few good data points on inflation and also be wary of unnecessary tightening.