MPC meet: RBI may keep policy rates intact

45ZN of the RBI Act says if the MPC fails to get to the mandated inflation figure of 2-6%, then, it will call the meeting and write a report to the govt explaining reason for failure to achieve the inflation target, remedial actions proposed to be taken and an estimated time period within which the inflation target shall be achieved

If sources are to be believed, there will be no statement/press release or any other communication from RBI after the MPC meeting so, clearly no rate decision. There lie several other logics in favour of no rate hike.

Talking to Bizz Buzz, Deepak Agarwal, CIO (Debt), Kotak Mahindra AMC, says: "Even though the MPC is next day after Fed meeting, where is Fed is likely to raise rates by 75 bps, we believe the today's (November 3) MPC meeting is to discuss report to government under section 45ZN and we assign a low probability of rate action in the said meeting."

The Reserve Bank has announced an unscheduled meeting of the Monetary Policy Committee on November 3. The meeting has been called under 45ZN of the RBI Act and Regulation 7 of the MPC regulations. The 45ZN act says if the MPC fails to get to the mandated inflation figure of 2-6 per cent, then, it will call the meeting and write a report to the government explaining reason for failure to achieve the inflation target, remedial actions proposed to be taken and an estimated time period within which the inflation target shall be achieved. September CPI inflation came in at 7.41 per cent YoY. Inflation seems to have peaked and likely to trend lower from current levels and come within the MPC inflation band latest by Q1FY24. RBI has hiked repo rate by 190 bps since April 22 in order to ensure positive real rates and bring down inflation within the mandated band. MPC voted 5:1 to increase rates by 50 bps in the September. Dr Goyal voted only for 35 bps rate increase. The MPC minutes indicated Professor Varma's assessment that the MPC should pause and take stock after the September policy.

SBI's group chief economic advisor, Soumya Kanti Ghosh is also of the similar view. He says, "The current unscheduled meeting on November 3, is only a part of the regulatory obligation and we do not foresee any other agenda to be announced at this meeting, even as it is scheduled a day after the Fed meet on November 2. Furthermore, looking at the past unscheduled meetings of MPC in March'20 and May'22, there were no press release of such meetings earlier and the announcement of rate decision was unscheduled in true sense." RBI in its Report on Currency & Finance (2020-21) has mentioned that in the case of India, failure may be redefined as inflation overshooting/ undershooting the upper or lower tolerance bands around the target for four consecutive quarters instead of current three quarters, he said.

Recent MPC minutes in India suggest some members looking for an early end to the rate hike cycle. The unseasonal rains in several parts of the country (in food grains producing states also) in October this year are affecting Kharif crops significantly. In states like UP, the unseasonal rain was more than 400 per cent above than the normal. In 2019, when unseasonal rains happened, average food prices more than doubled from 4.9 per cent to 10.9 per cent. Currently, the September food inflation is at 8.4 per cent and a similar trend like the one seen in 2019 can put headline inflation towards 7.5 per cent in December. This could put a spanner to the inflation projections of RBI and market consensus. This could also mean that the terminal repo rate could still be difficult to comprehend at this time, though consensus puts it at 6.5 per cent, says a report by SBI economists. Nevertheless, liquidity deficit in the banking system has been now consistently running at Rs 60,000 crore for the last 4 days. Banks have adjusted deposit rates significantly upwards in October. If we look at the historical interest rate cycles, the increase in deposit rate lags the increase in lending rates. Also, given that 45 per cent of bank deposits are CASA, it is only the 55 per cent of term deposits that need adjustment and hence ideally, there will always be less than full adjustment of deposit rates to repo rates. In the current cycle, with a CASA ratio of 45 per cent, a 190 basis point increase in repo rate could result in 105 basis point increase in deposit rate (190.55 per cent). Any deposit rate increase beyond that will be an additional one. To put things in perspective, SBI has already raised its 1 year deposit rate by 100 basis points.

The good news is that Indian currency has continued its comparative resilience, strengthening on the back of recent fall in Dollar index. Even though the current Dollar descend could be a temporary phenomenon as markets love to side with somewhat illusory narratives before policy meets that inflation has peaked due to policy actions, the wild swings seen post select tech behemoths' results point to markets pricing in more the weaker forward guidance over the better than expected immediate results. Also, on ECB front, during the first five months in FY23, total ECB raised by corporates is a paltry $8.26 billion (against $11.23 billion in first five months during FY22 and $39.89 billion during the full year). If better rated Corporates raise fresh ECB now, that should help the RBI in also doing Buy/Sell swaps, bringing down hedging cost while lowering the Forward Premia too! This will mean an improvement in capital flows that could have a positive bearing on exchange rate outlook.