All eyes on liquidity measures

Status Quo

♦ Banking analysts forecast status quo on policy rate

♦ Inflationary pressures may arise because of weaker monsoon and rising crude oil prices

♦ Tightening in liquidity that was seen in Sept is unlikely to sustain

♦ It’s particularly with release of liquidity from incremental CRR imposed in previous policy

♦ RBI cautious on sharp rise in interest rates in developing economies

♦ It may have impact on the capital flows, forex reserves and the exchange rate

The Monetary Policy Committee (MPC) of RBI, which will start three-day marathon policy review meeting, beginning from Wednesday (October 4), is likely to maintain status quo on key policy rates.

Madan Sabnavis, Chief Economist, Bank of Baroda, says: “The credit policy this time will most likely continue with the existing rate structure as well as policy stance. Hence, the repo rate will be retained at 6.5 per cent with the stance of withdrawal of accommodation. Inflation is still high at 6.8 per cent and while we do expect it to come down sharply in September and October, there is still some pessimism on Kharif output especially relating to pulses, which have potential to push up prices further.”

But as the inflation trajectory is downwards a rate hike can be ruled out. However, we may have to wait for a longer time for the MPC to cut the Repo rate. In this context, the RBI will revise the Q2 inflation numbers for certain and maybe also that for the year. But we do not expect the headline number to change by more than 0.1 per cent, he said.

According to Sabnavis: “We do not expect any specific liquidity measures as it is tight today and the RBI is in the process of rolling back the ICRR, which was invoked in the last policy. In my view, the RBI may have to look at ways to induce liquidity through OMO or V2R in case the liquidity situation remains as tight as it is today given that the banks are seeking recourse to the MSF on a daily basis.”

Here a lot will depend on how the government spends to bring back liquidity in the system. It may be expected that it will start in October once the September accounts are closed and the fiscal deficit reviewed.

The upcoming RBI October Monetary Policy review is coming at the backdrop of inflationary concerns across the globe that might force central banks to maintain disinflationary stances well into 2024. Further inflation adjusted real yields that have risen to their highest level since 2009 is providing headwinds across the globe thereby increasing cost of borrowings.

Mandar Pitale, Head- Treasury, SBM Bank India, says, “RBI is expected to maintain pause in October policy. Overnight rates are ruling about an average of 15bp above Repo rate for a reasonable time owing to tight liquidity conditions. This can be construed as having a similar impact to a 25 bp hike in Repo rate.”

Further, RBI will retain the stance of withdrawal of accommodation as CPI is unlikely to come below 5 per cent during the rest of FY24.

Karthik Srinivasan, Senior Vice President & Group Head - Financial Sector Ratings, ICRA, says, “We expect the MPC to maintain status quo on the policy rate as well as the stance as inflationary pressures may arise because of weaker monsoon and rising crude oil prices.”

The significant tightening in liquidity that was seen in the second half of September is unlikely to sustain, particularly with the release of liquidity from incremental CRR imposed in previous policy, he said.

The RBI is likely to remain cautious on sharp rise in interest rates in developing economies since the last policy review and the impact it may have on the capital flows, forex reserves and the exchange rate as well.