(Reuters) -The Reserve Bank of India's key lending rate was held steady at a fourth consecutive policy meeting on Friday, as widely expected, but signalled it would keep liquidity tight using bond sales (OMO sales) to bring inflation closer to its 4% target.
The country's monetary policy committee (MPC) kept the repo rate unchanged at 6.50%, in a unanimous decision. Most economists polled by Reuters had expected it to keep rates steady.
The committee remains "resolutely focused on aligning inflation to the 4% target on a durable basis," RBI Governor Shaktikanta Das said.
COMMENTARY:
UPASNA BHARDWAJ, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI
"The MPC, on expected lines, delivered a status quo policy both on rates and stance. We expect the MPC to maintain a prolonged pause while using liquidity tools more frequently to manage the stance given the volatile global environment."
SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI
"The RBI's decision to pause along with retaining the withdrawal of accommodation stance was in line with expectations."
"Importantly, the RBI has explicitly highlighted the need to use OMO sales to modulate liquidity. This will weigh down bond markets' sentiments."
"Concerns on food inflation were highlighted, which can impart upside to headline inflation. We believe that inflation risks remain on the upside, given weather-related impact as well as commodity prices. Global monetary conditions will also weigh on RBI's policy decisions."
"The good part is that growth remains resilient and core inflation remains under check. We maintain our call for a prolonged pause on repo rate at 6.5% well into FY25 while liquidity over the medium term will be aimed at being close to neutral."
SAKSHI GUPTA, PRINCIPAL ECONOMIST, HDFC BANK, GURUGRAM
"As expected, the RBI delivered a status quo policy. The central bank also kept its growth and inflation forecast unchanged."
"Given the pulls and pressures on liquidity conditions in the coming months, the RBI did not announce any durable liquidity absorption measures (like CRR), in line with our expectations."
"However, they signalled that, if required, they are open to the option of conducting OMO sales to manage liquidity conditions. The 10-year yield could trade higher with the door being opened for OMO sales. Moreover, elevated U.S. yields could also continue to exert pressure in the near term."
"For macro indicators, we expect September inflation print at 5.3% and full year to average at 5.4%."
GARIMA KAPOOR, ECONOMIST, INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI
"We see the MPC holding rates throughout this fiscal year amid expected stickiness in domestic food inflation, higher rates in the United States and upside risks to crude oil prices."
"The announcement of possible OMO sales in the later part of the year will likely help the RBI maintain liquidity in line with its stance, as inclusion in the JP Morgan Global EM Bond Index leads to gradual improvement in FII inflows into the debt market."
RADHIKA RAO, SENIOR ECONOMIST, DBS BANK, SINGAPORE
"Despite a pause, the RBI MPC's hawkish language suggests price stability is moot and domestic financial conditions will remain tight."
"Policymakers are also mindful of the tight external financial conditions and narrowing (IN-US) rate differentials, notwithstanding the comfortable reserves cushion and impending foreign bond inflows."
MADHAVI ARORA, LEAD ECONOMIST, EMKAY GLOBAL, MUMBAI
"The RBI reiterated caution and the current policy narrative is still more hinged to inflation uncertainty and liquidity management than on the fluid and uncertain global narrative as markets reprice 'higher-for-longer'."
"As global financial conditions transmit with a lag, there could be further volatility ahead. Even as domestic inflation is likely to meet policy targets by end-FY24, elevated DM (developed market) rates and record-low interest differentials pose a headwind for the RBI."
"Amid the changing external dynamics, the policy prerogative would ensure financial stability, which may possibly even precede inflation management in coming months."
KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU
"While raising the red flag about a potential challenge to inflation, the central bank kept its policy inflation forecast for FY24 unchanged at 5.4%, slightly lower than our expectation of 5.5%."
"However, surprisingly, the bank kept the real GDP growth expectation unchanged at 6.5%, despite the fact the deflator induced real GDP growth will moderate comprehensively during H2 FY24."
ANJALI VERMA, CHIEF ECONOMIST AND CO-HEAD RESEARCH, PHILLIPCAPITAL INDIA, MUMBAI
"We expect the RBI to be on a prolonged pause. Liquidity should ease with one leg of I-CRR reversal tomorrow. However, the RBI stated that OMOs will be done for better liquidity management. This is likely in case FII flows in the bond market continue to trend higher in the run-up to the JP Morgan index inclusion."
TERESA JOHN, DEPUTY HEAD OF RESEARCH, LEAD ECONOMIST, NIRMAL BANG, MUMBAI
"The RBI sees high inflation as a high risk to financial stability and sustainable growth and remains resolutely focused on its 4% inflation target. However, there is progress in anchoring inflation expectations, with inflation in the single-digit zone for the first time since COVID-19."
"Concerns remain over lower sowing of Kharif pulses and oilseeds, lower reservoir levels and global food price shocks despite easing vegetable prices."
"The RBI reiterated that the inflation target is 4% and not 2%-6%. This implies that the rate cut cycle can get pushed back. Our base case remains for a rate cut in Q4 FY24 if the Federal Reserve signals an end to its rate hike cycle. However, we believe the rate cut cycle will be shallow (not more than 50 bps)."
SUJAN HAJRA, CHIEF ECONOMIST AND EXECUTIVE DIRECTOR, ANAND RATHI SHARES AND STOCK BROKERS, MUMBAI
"A rate cut in the next 12 months is exceedingly unlikely. On the plus side, the (RBI) governor expressed strong confidence that India will maintain strong growth and that inflation will continue to fall, albeit slowly. These forecasts are encouraging for both the equity and debt markets in the medium term."
"However, the strong possibility of the RBI remaining on hold for an extended period of time as well as the continuance of liquidity tightening is bad for interest-sensitive industries."
ARUN KUMAR GARODIA, CHAIRMAN, ENGINEERING EXPORT PROMOTION COUNCIL OF INDIA, KOLKATA
"The RBI has ensured a stable monetary policy and at the same time successfully tamed inflation. From now on, we see this trend to continue, which will help the engineering industry grapple with weak demand from key markets."
"In the wake of slowing trade, exporters need the necessary cushion to withstand external shocks and uncertainties. The current financial year has been quite challenging for engineering exporters even as August shipments registered an uptick mainly due to a favourable statistical base."