Analysis: Why RBI's Monetary Policy Committee kept the policy repo rate unchanged?

Even as the global economy struggles with elevated inflation, high levels of debt, and volatile financial conditions, the Reserve Bank of India's ("RBI") Monetary Policy Committee (MPC) today on August 10, 2023, kept the policy repo rates unchanged at 6.5 % for the third time this fiscal year.

Here is what was in the spotlight:

• The RBI observed that the Indian economy is growing at a 'reasonable pace', becoming the fifth largest economy in the world^ and contributing around 15 per cent to global growth.
• The central bank has kept India's Gross Domestic Product (GDP) growth forecast unchanged at 6.5% for fiscal 2023-24.
• It has raised the Consumer Price Index ("CPI") inflation forecast for the current fiscal upwards to 5.4% from 5.1% and will continue a firm focus on aligning inflation to the target of 4%.
• In view of the excess liquidity in the system, banks will be required to 'temporarily' uphold an incremental Cash Reserve Ratio (CRR) of 10% on the increase in their net demand and time liabilities (NDTL) between the specified period.
• It also noted that the banks with historically high capital levels, declining non-performing assets, and rising profitability remain healthiest in more than a decade. The balance sheet of corporates also looks robust.

The Rationale: Why has RBI maintained the status quo on the policy repo rate?

The high prices of vegetables have impacted inflation recently. However, as per the MPC, the vegetable price shock may reverse quickly. 

• However, it noted that possible El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far to check inflation trends.  
• Nevertheless, it observed that domestic economic activity is holding up well and may retain its momentum despite weak external demand.
• Accordingly, RBI decided to keep the rates unchanged but also decided to remain vigilant 'with preparedness to act if required.  
• It also noted that given that inflation remains higher than the 4% target, the central bank will remain focussed on the 'withdrawal of accommodation' stance.

In-house view: 

The country's macroeconomic fundamentals seem to be well-placed. Given the measures on the liquidity, the Yield of up to one year of assets remains flat, while the long maturity yield has marginally eased.

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Source: Reserve Bank of India: https://www.rbi.org.in/ data as on August 10, 2023

               Kotak Mahindra Asset Management Company Limited Internal Research, data as on August 10, 2023

^ In terms of GDP at market exchange rate

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