RBI keeps all options open to manage liquidity

The status quo on key policy rates in the meeting of the monetary policy committee (MPC) was no surprise.
 

The communication from the Reserve Bank of India (RBI) remains a balanced and pragmatic one.
 

The central bank came across less hawkish in December, taking into account softer commodity prices and global activity indicators in recent months.

The upward revision in growth expectation by the RBI remains noteworthy, especially given stronger confidence on further broad-basing of domestic growth momentum. On the inflation front, while a few high readings seem imminent, the RBI appear prepared to look through spikes in headline inflation prints if it is triggered by short-lived supply shocks without major spill over risks.
 

At the same time, today’s communication clearly suggests that any expectation of a cut in the repo rate in the near term should be avoided.
 

The global macroeconomic backdrop continues to be complicated. Inflation and central bank policy rates seem to have peaked for most countries, while the pace of economic activities remains varied across economies.
 

A number of major central banks, including the US Federal Reserve, Bank of England, and European Central Bank have kept

policy rates unchanged while reiterating their ‘higher-for-longer’ narrative on rates.
 

The RBI continues to keep all options open in order to manage liquidity as and when required.
 

While the US’ GDP growth of 4.9 per cent in the second quarter of 2023 came in significantly above expectations, more recent employment and price data indicate that the US economy is gradually losing steam.
 

New job openings in the US in October have fallen to their lowest level since March 2021, while the core-personal consumption expenditures (PCE)  at 3.5 per cent just managed to meet expectations and was down materially from an average of 4.6 per cent during the first half of 2023.
 

This has induced US markets to factor in faster rate cuts with around 60 per cent probability being baked in for at least 25 basis points of rate cut by March 2024.
 

With domestic macroe­co­nomic fundamentals seemingly better anchored, the course of monetary policy actions by major global central banks will likely have a strong bearing on the RBI’s policy choices during 2024.
 

On the back of a balanced narrative on growth and inflation dynamics, one feels more convinced about a balanced, yet pro-active and decisive approach from the RBI, which had typically been the case in the recent past.
 

The central bank clearly remains cognizant and mindful of the risks from over-tightening as future outlook, particularly on the global front, remains far from certain.
 

In sum, with inflation likely reigning above 5 per cent in the coming months and a generally conducive growth dynamics, one expects the RBI to hold the key policy rates steady, say, over the next six months, while staying proactive in managing liquidity.
 

Today’s communication once more underscored the central bank’s resolve and preparedness to remain pro-active in assessing and mitigating risks on all fronts including weather aberrations, geopolitical tension and volatility in global financial markets, if any.

The author is chief economist & head of research at Bandhan Bank.

The author thanks Gaurav Mukherjee for his assistance.

Views are personal