MUMBAI: The RBI is expected to announce a continuation of its pause on interest rates after the bi-monthly review meeting of the monetary policy committee (MPC) scheduled for December 8.
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Analysts predict a fifth consecutive pause by the MPC because of stronger-than-expected economic growth numbers. RBI will likely maintain a cautious stance, accompanied by hawkish rhetoric.
The positive surprise in the July-September quarter GDP growth has bolstered confidence in RBI’s focus on sustaining economic growth. Despite concerns about potential food price shocks affecting inflation expectations, the central bank may find solace in moderating core inflation.
Rahul Bajoria, an economist at Barclays, suggests a shift in RBI’s focus from rate-setting to other monetary policy instruments. “RBI’s focus now seems to be on using other instruments in its monetary policy toolkit, including liquidity management and macroprudential measures, to facilitate the transmission of earlier rate hikes and to curb risky lending behaviour, respectively,” said Bajoria.
While the absence of a rate hike is favourable for those with home loans and other borrowers, they may have to wait until after the general elections for a rate cut. Besides interest rates, RBI is also expected to announce development measures in its policy for promoting the use of central bank digital currency (CBDC).
Last month, to slow down growth in the unsecured personal loan segment, RBI had hiked capital requirements for both banks directly lending to this segment and lending to finance companies focusing on this sector.
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Besides retail, much of the growth is driven by government investment in infrastructure, which reduces the risks for lenders. However, there is some risk build-up here as well. “We have seen instances where an EPC (engineering, procurement, construction) company raised money at the holding company level to invest as equity in the operating company,” said an official with a rating agency.
Radhika Rao, an economist with DBS Bank, anticipates that the MPC will defer any changes to its policy stance in the upcoming review and sees more prudential measures. “Instead, the authorities are likely to focus on gradually withdrawing incremental liquidity and undertake a targeted approach via macroprudential measures as demonstrated by the recent move to tighten risk weights on consumer loans,” said Rao.
Abhishek Upadhyay, an economist at ICICI Securities PD, highlights the robust growth momentum and well-behaved core inflation as factors supporting the anticipated pause. Suman Chowdhury, chief economist and head of research at Acuite Ratings & Research, foresees a sustained pause with potential inflationary pressures, especially if El Nino weather events impact food inflation.
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Economists also expect the MPC to address the slowdown in monetary transmission, emphasising the necessity for a “withdrawal of accommodation” amid deficit liquidity conditions.
