RBI holds steady with a hawkish undertone
- The RBI held the policy repo rate unchanged at 6.5% in its August 2023 MPC meeting, on expected lines. The Governor reiterated the RBI’s commitment to bring inflation down to 4% on a durable basis. The Governor said, “We do look through idiosyncratic shocks, but if such idiosyncrasies show signs of persistence, we have to act”. Buoyed by a spike in food prices, headline CPI print for July 2023, is likely to come in closer to 6%.
- Food inflation remains elevated and high prints are concentrated in a few items – rice, atta, tomato, ginger, garlic, toor dal, dry chilli, jeera, ghee, salt, and coffee powder. These prices are expected to ease in the coming months. Vegetable prices have started to show some correction in the first week of August, compared to the preceding week. On the global front, geopolitical tensions have led to some hardening of food prices. Global oil prices too are up 12% in August compared to a month ago on concerns over tightness in the physical market. This, however, is unlikely to have a significant impact on headline CPI. The government has controlled the retail prices of petrol and diesel and kept them steady since last year.
- The Governor highlighted the concerns over the surplus liquidity in the system and the lukewarm repose to the VRRR auctions. To absorb the excess liquidity, the RBI has introduced a temporary measure of incremental cash reserve ratio (I- CRR) of 10% on the increase in banks’ net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023. The CRR has been left unchanged at 4.5%.
The RBI has revised its inflation outlook for FY24 to 5.4% from 5.1%, with a sharp upward revision to the Q2FY24 inflation forecast. The Governor also repeatedly reiterated that bringing headline inflation within the tolerance band is not enough, it needs to be at 4.0% target on a durable basis. Closing remarks from the Governor’s statement open a slight possibility of a rate hike in the future in case the inflation numbers fall out of line with the RBI’s projections. The RBI is unlikely to lead the rate cut cycle and would wait for developed markets central banks to cut rates first. We feel the RBI will maintain status quo in the next policy meeting as well.
CPI inflation forecast raised by 100 bps for Q2FY24
Food inflation has always been volatile
CPI inflation forecast raised by 100 bps for Q2FY24
Food inflation has always been volatile
Headline inflation easing unevenly across economies
Surplus liquidity up by 50% (Aug vs Jul’23)
Headline inflation easing unevenly across economies
Surplus liquidity up by 50% (Aug vs Jul’23)
Core inflation is steady
43% items in the CPI basket experiencing >6% inflation
Core inflation is steady
43% items in the CPI basket experiencing >6% inflation
VRRR auctions receive a lukewarm response
Deposit and credit growth gap narrowed in Jun’23
VRRR auctions receive a lukewarm response
Deposit and credit growth gap narrowed in Jun’23
Average retail mandi prices
TruQuest is knowledge series launched by TruBoard Partners providing succinct updates and views on:
- Liquidity outlook
- India’s macro economic view
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Team:
Anuj Agarwal, Chief Economist
Ria Rattanpal, Research Associate
Author:
Anuj Agarwal, Chief Economist
Ria Rattanpal, Research Associate
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