RBI MPC meeting: The art of policy communication

The monetary policy committee (MPC) decided to keep the policy repo rate unchanged without committing to a pivot. From this perspective, current policy remains a non-event, largely on expected lines.

Interestingly, the projections for gross domestic product (GDP) and inflation have undergone some revisions considering the new information in the intervening period. Upward revisions in GDP have happened in Q1FY24, with marginal downward revisions in the second half with FY24 GDP retained at 6.5 per cent. Inflation projection for FY24 has undergone marginal downward revision from 5.2 per cent to 5.1 per cent. The inflation trajectory is now conditional on spatial variation of monsoons and possible development to El Niño. Domestic wheat prices could see some correction on robust mandi arrivals and procurement under the shadow of a possible sharp drop in output in Australia.

Meanwhile, liquidity surplus in the system has again increased from mid-May. The government surplus cash balances also started declining, increasing the surplus. Even the deposit of Rs 2,000 notes in banks has added to the liquidity. At the current rate, bank deposits are likely to increase by at least Rs 2 trillion. This could effectively imply that spate of deposit rate hikes could be a thing of the past.

Against this background, the RBI policy statement is cautious and pragmatic and is clearly aimed at managing expectation buildup of a rate cut not any time soon. The emphasis on 4 per cent is to clearly anchor the market expectations for the future. Coupled with this is the global uncertainties with central banks in Canada and Australia raising rates after a pause. There is also a clamor by European Central Bank officials to raise rates further. However, exports from China posted a large decline in May. All this indicates that the outlook on global economy is clouded by sideways movements in most of the indicators even when moderating inflation, tighter financial conditions, banking sector stress, and lingering geopolitical conflicts persist.

On the development and regulatory policy front, the announcement covers a wide range of areas. The banking regulation in terms of widening of the scope of prudential framework for stressed assets is a good move given that banks have largely cleaned their balance sheets. The decision to bring some order in default loss guarantee arrangement in digital lending is desirable as it brings some visibility in the off-balance sheet risk underwritten by lending platforms.

The decision to extend the phase-in time for achieving the priority sector lending targets by urban cooperative banks will help them to glide over the target with more ease. Giving flexibility to banks to decide limits on call lending might help the smaller banks to borrow more via this window.

In the payments domain, the scope of the existing digital payment architecture has been widened. The RBI will now permit non-bank prepaid payment instrument (PPI) issuers to issue e-RUPI vouchers. Further, RuPay Cards will be enabled for issuance in foreign jurisdictions

Overall, we find a combination of declining unemployment rate and stabilising vacancy rate over the period of the RBI rate hike cycle, implying such rate actions have been able to successfully trim the excess labour demand in the market without contraction in employment. The declining inflation expectations signifies that the lagged impact of rate hikes will be able to successfully control inflation in the target band.

The author is Group Chief Economic Advisor, State Bank of India. Views are personal