RBI Monetary Policy October 2023

In October 2023 meeting, RBI’s Monetary Policy Committee (MPC) decided to hold the repo rate at 6.5% and retained its policy stance. The RBI Governor noted that transmission of the 250 bps increase in the policy repo rate to bank lending and deposit rates is still incomplete. Therefore, the MPC decided to remain focused on withdrawal of accommodation.

The MPC reiterated its commitment to align inflation with the 4% target on a durable basis. The committee expressed the readiness to prevent any spill-over effects from food and fuel price shocks on underlying inflation trends. The monetary policy continues to be ‘actively disinflationary’ to prevent recurrent incidents of overlapping price shocks from causing a generalized and persistent increase in headline inflation.

The RBI announced its intention to conduct Open Market Operation (OMO) sales to absorb excess liquidity, with the timing and extent contingent on evolving liquidity conditions. The Governor reiterated that an excessive level of liquidity can pose risks to both price and financial stability.

The RBI retained its inflation forecast for FY24 at 5.4% YoY, with slight adjustments to the quarterly forecasts. The near-term outlook for inflation is expected to improve due to corrections in vegetable prices and recent reductions in LPG prices. The future trajectory of inflation will depend on several factors, including lower area sown under pulses, low reservoir levels, El Niño conditions, and the volatility of global energy and food prices.

The RBI also maintained its projection for FY24 real GDP growth at 6.5% YoY. It expects domestic demand conditions to benefit from sustained buoyancy in services, a revival in rural demand, consumer and business optimism, government investment in capital expenditure, and the healthy financial positions of banks and corporations. However, the growth outlook faces headwinds from global factors such as geopolitical tensions, volatile financial markets and energy prices, and climate shocks.

The RBI is expected to maintain a prolonged pause until there is visibility of inflation sustainably reaching the 4% target. The RBI is also likely to maintain neutral liquidity conditions due to financial stability and inflationary risks associated with excess liquidity.

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