RBI Monetary Policy December 2023

In the December 2023 meeting, the RBI Monetary Policy Committee (MPC) decided to hold the repo rate at 6.5% and retained the policy stance. The RBI Governor noted that monetary policy remains ‘actively disinflationary’ to ensure anchoring of inflation expectations and durable alignment of headline inflation to the 4% target rate.

The MPC observed that recurrent food price shocks are impeding the disinflation process. They expressed concerns about the risk of frequent and intense shocks leading to price generalization.  However, the Governor emphasized that monetary policy would look through one-off shocks.  The Governor also stressed that the MPC remains highly alert and prepared to undertake appropriate policy actions, as warranted.

The Governor mentioned that the need to undertake OMO sales auctions has not arisen despite the announcement in the last policy. This is due to liquidity remaining tight from currency leakage during the festive season, high government cash balances, and market sales operations by the RBI.

The Governor also noted that the recent pre-emptive measures implemented by the Reserve Bank for banks and NBFCs aim to tackle potential risks and safeguard the resilience of the financial sector, emphasizing that financial stability is a public good.

The RBI retained the FY24 inflation forecast at 5.4% YoY. Near-term inflation is expected to pick up due to an increase in the prices of key vegetables. Adequate cereals buffer stocks, proactive supply-side interventions by the government, and the softening of global commodity prices pose downside risks to inflation. However, volatile food and crude oil prices, along with persisting price pressures for services firms, pose upside risks.

The RBI revised FY24 real GDP growth to 7% YoY, up from 6.5% YoY in the previous policy. Domestic demand conditions are expected to benefit from continued strengthening of manufacturing, healthy bank and corporate balance sheets, gradual recovery in the rural sector, and improving business optimism. However, the growth outlook faces headwinds from geopolitical tensions, volatile financial markets, and geo-economic fragmentation.

We expect the RBI to maintain a prolonged pause until there is visibility of inflation durably aligning with the 4% target. Additionally, the RBI is likely to maintain neutral liquidity conditions due to financial stability and the inflationary risks associated with excess liquidity.

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