RBI to maintain hawkish stance on interest rates, keep liquidity tight

The Reserve Bank of India (RBI) is expected to maintain a hawkish stance on interest rates and uphold its key lending rate, on Friday. 

Inflation control remains a top priority, especially in light of anticipated increases in food prices in the coming months and stronger-than-expected economic growth.

The six-member monetary policy committee (MPC), comprising three RBI and three external members, is likely to keep the repo rate steady at 6.50 per cent, marking the fifth consecutive policy meeting with a unanimous consensus, according to a Reuters poll. 

Since May 2022, the RBI has raised the repo rate by a total of 250 basis points to curb rising inflation, which, despite dropping to a four-month low of 4.87 per cent in October, is expected to remain above the RBI's 4 per cent medium-term target.

Swap markets are indicating that RBI may only begin cutting rates in mid-2024, at least a quarter after the anticipated start of policy loosening by the US Federal Reserve.

Gaura Sen Gupta, an economist with IDFC First Bank, said that the RBI's focus is likely to remain on maintaining tight liquidity conditions to facilitate the transmission of previous rate hikes and prevent generalised price pressures.

While the RBI is expected to keep its inflation projections unchanged, some analysts anticipate a revision to its growth estimates following recent robust GDP figures. India's economy grew at a rate of 7.6 per cent in the July-September quarter, surpassing both the polled median of 6.8 per cent and the RBI's estimate of 6.5 per cent.

RBI's current forecasts project inflation averaging 5.4 per cent in the current financial year ending in March, with full-year economic growth at 6.5 per cent.

Although the RBI mentioned the possibility of open market operation (OMO)-based bond sales in October to maintain tight liquidity, such sales have not materialised. 

Any major adjustments to the approach to liquidity could impact bond yields, according to traders.

While explicit measures to tighten financial conditions are not expected, the RBI may adopt a cautious tone. 

Abhishek Upadhyay, a senior economist at ICICI Securities Primary Dealership, suggests that the RBI may not express concern about the current tightness in banking system liquidity but could continue to keep the option of OMO sales open to manage liquidity and financial conditions.

In October, RBI tightened rules for small personal loans and encouraged banks to raise deposit rates to ensure the complete transmission of previous rate hikes. 

Madhavi Arora, lead economist at Emkay Global Financial Services, notes the possibility of the RBI softly encouraging banks to enhance transmission, although direct intervention in commercial decisions is unlikely.

(With Reuters Inputs)