RBI likely to maintain prolonged pause on rate hikes

Monetary policy Committee (MPC) of RBI, whose minutes are just out, has flagged inflationary risks. Also, it has emphasized that liquidity will be key going forward. Moreover, it may go for a prolonged pause, when it comes to rate hike.

The minutes of the October RBI MPC meeting highlighted members’ increased focus on returning inflation to the 4 per cent target. While noting that supply-side shocks remained transient, members highlighted that the recurrence of these shocks increases generalization risks. Some members also stressed the need to manage liquidity actively. Analysts maintain their view of MPC’s prolonged pause and expect system liquidity to remain tight in the near term.

Members are concerned on inflation generalization, whereas growth concerns remain low. All members pointed to persistence of inflationary pressures from recurring supply shocks. They noted that though the shocks were transitory, the intensity of the shocks had increased, increasing risks of inflation generalization. Governor Das also highlighted that the recurring nature of these shocks further increases the risks of possible loss of monetary policy credibility and de-anchoring of inflation expectations. Meanwhile, Dr Varma noted that the small shortfall in monsoons was more likely to cause ‘a few short-lived inflation spikes rather than a sustained rise in inflation’.

On growth, all members expressed comfort noting the resilience exhibited so far, despite uneven growth globally. Governor Das noted that the policy mix pursued during recent years fostered economic stability. Meanwhile, Dr Patra highlighted that price stability had to remain the focus, as it could derail growth prospects by hurting the purchasing power.

Whatever be the case. But one thing is crystal clear. The RBI is set to actively manage the liquidity going forward. Some MPC members made reference to the need for active management of liquidity. Governor Das noted that liquidity is expected to remain adequate in the coming months, amid an expected pick-up in government spending.

However, this could be offset, in part, by CIC leakage. Dr Goyal highlighted that fine-tuning liquidity was not yet adequate to keep the WACR near the repo rate. Dr Goyal also noted that given varying shocks to short-term liquidity, durable liquidity would have to be adjusted (through tools such as OMOs) to offset the impact.

MPC, most probably, is to maintain prolonged pause on the rates, no matter if near-term liquidity remains tight. The minutes of the October RBI MPC meeting brought out members’ concerns of recurring shocks, increasing the uncertainties in the inflation outlook. Kotak Institutional Equities sees upside risks to the inflation trajectory. Of course it will be stemming rising crude oil prices and weather-oriented disruptions.

Experts do not see inflation durably settling near the 4 per cent target, at least in the next 12 months.

Accordingly, they retain their view of a prolonged pause by the RBI. Further, they expect the RBI to keep liquidity conditions tight in near term to provide a cushion from any adverse global event.