During the most recent meeting of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), it was decided to maintain the repo rate at 6.50%, signaling a pause in the series of rate hikes that began in May of the previous year. The State Bank of India (SBI) anticipates that this pause will continue in the upcoming June policy meeting and expects a prolonged period of unchanged rates. According to the SBI report, the RBI’s decision to hold rates steady was a temporary arrangement driven by concerns over potential banking failures and the risk of contagion spreading through global markets. The report highlights the courageous nature of the RBI’s decision, particularly in light of climate risk, which has the potential to disrupt inflation projections.
One significant factor mentioned in the report is the surplus of liquidity in the banking system. As of June 1, the Net LAF absorption stood at Rs 2.4 lakh crore, representing a surplus compared to the beginning of the fiscal year. The report suggests that this surplus is likely to increase further in the coming months, primarily due to the deposit of Rs 2,000 notes. This surplus liquidity situation provides additional support for the argument that the RBI will maintain a pause in rates.
In terms of inflation, the report suggests that data until October is expected to reflect a level below 5%. This could potentially lead to a downgrade in inflation estimates for the fiscal year 2023-24, which will be discussed in the June policy meeting. However, despite the potential adjustment in inflation expectations, the report emphasizes that economic growth remains robust. In fact, there is a possibility of an upgrade in growth projections for the same fiscal year.
The SBI report also proposes a tactical shift in the RBI’s forward market intervention strategy. It suggests utilizing sell buy swaps to neutralize liquidity and allow the Indian Rupee to find its own level. The report mentions a significant forward maturity of approximately $12 billion in the 3-12 months bucket, which could provide an opportunity for the RBI to implement this tactical shift.
Furthermore, the report highlights the possibility of the US Federal Reserve raising rates in June and subsequently pausing. This development could have implications for the global economic environment and may influence the RBI’s monetary policy decisions.
It is worth noting that the report refrains from providing forward guidance. Given the current environment of rising interest rates, the report deems it unadvisable to offer any specific indications about future policy directions.