India's central bank holds key rate steady as expected

(Reuters) - The Reserve Bank of India's key lending rate was held steady for a third straight policy meeting on Thursday, as widely expected, as inflation concerns resurfaced following higher-than-usual seasonal spikes in food prices in recent weeks.

The monetary policy committee (MPC), which has three members from the central bank and three external members, kept the repo rate unchanged at 6.50% in a unanimous decision.

COMMENTARY:

SACHCHIDANAND SHUKLA, GROUP CHIEF ECONOMIST, LARSEN & TOUBRO, MUMBAI

"Given that El Nino risks remain and all the RBI's inflation forecasts assume a 'normal monsoon' means the central bank will keep rates higher for longer. It also means that any rate cut expectation needs to be pushed out further and will be contingent on any cuts in fuel prices by oil marketing companies, the Budget in February and the stance of the Fed."

SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI

"The RBI will remain on a prolonged pause given the aim to revert inflation to the 4% target (while inflation remains around the 5% handle for now), watch for the durability of the recent price increases and impact on inflation expectations, and gauge the impact of the 250-bps rate hike on growth-inflation dynamics."

ANJALI VERMA, CHIEF ECONOMIST AND CO-HEAD RESEARCH, PHILLIPCAPITAL INDIA, MUMBAI

"Tightening of liquidity... is a timely step. This will keep near-term rates elevated."

AURODEEP NANDI, INDIA ECONOMIST AND VICE PRESIDENT, NOMURA, MUMBAI

"The dilemma for the RBI in the run-up to the August policy meeting was that on the one hand, the sharp rise in vegetable and broader food prices led to a sharp increase in the inflation outlook, which risks impacting the RBI's inflation-targeting credibility if it sounded too dovish. On the other hand, the supply-side nature of these shocks and softening core inflation limit the need for monetary policy tightening."

"In the meeting, the RBI struck a fine balance between the two by retaining policy interest rate and 'withdrawal of accommodation' stance and stating that it is ready to look through the inflation increase 'for some time', but also expressed the readiness to act in case inflationary pressures generalise."

"The key surprise for the market though was the temporary imposition of incremental cash reserve ratio (CRR) of 10% to absorb surplus liquidity."

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

"Expectedly, RBI kept the policy rate unchanged at 6.5%, while keeping the monetary policy stance at 'withdrawal of accommodation'. Expectedly, RBI telegraphed its intent to remain data-dependent by keeping options open for even possible rate hikes if inflation surprises to the upside, given the uncertainty around eventual inflation trajectory."

"It appears that (the) eventual impact of El Niño will be the most important driver."

"The central bank raised its full-year inflation forecast to 5.4%, exactly in line with our revised expectation. With near-term inflation moving ahead of expectation, we have moved our policy rate cut expectation from Q4'23 to Q2'24."

DEVENDRA KUMAR PANT, CHIEF ECONOMIST, INDIA RATINGS & RESEARCH, GURUGRAM

"The RBI's decision of maintaining the status quo was on expected lines. The revised inflation forecast to 5.4% from 5.1% appears to be realistic. Declining core inflation suggests weakness in demand, 6.5% GDP growth in FY2024 may be slightly optimistic."

"Transparency in interest rate reset on EMIs is a welcome step from consumers' point of view."

ANITHA RANGAN, ECONOMIST, EQUIRUS GROUP, MUMBAI

"Notably, inflation estimates, especially near-term estimates (Q2, Q3) have been revised upwards meaningfully, while growth estimates are retained. Furthermore, Q1'25 inflation estimate of 5.2% and the governor reiterating commitment to align to 4% on a durable basis suggests that rate cuts are out of way beyond the near term."

"Higher for longer is not just for the external world but also for India. Domestic growth resilience is countered by external risks and inflation. The RBI is not ruling out hikes if necessary. Clearly, cuts are out of sight."

SUJAN HAJRA, CHIEF ECONOMIST & EXECUTIVE DIRECTOR, ANAND RATHI SHARES AND STOCK BROKERS, MUMBAI

"Despite raising the near-term inflation estimate, the RBI kept the longer-term inflation estimate unchanged. This implies that the RBI views the current inflation spike as transitory. This explains why the RBI maintained the status quo on policy rate action."

"The temporary incremental CRR increase is a reaction to the sharp increase in systemic liquidity overhang, which is attributed primarily to the demonetisation of Rs 2,000 notes. We expect this measure to be reversed as systemic liquidity approaches balance."

"At the same time, we believe that by maintaining its liquidity tightening stance, the RBI maintained its concern about upside inflation risk."

RADHIKA RAO, SENIOR ECONOMIST, DBS BANK, SINGAPORE

"The RBI MPC commentary can be characterised as a pause with hawkish underpinnings. The accompanying commentary reflected the MPC's vigilance on inflation, whilst highlighting the supply-driven nature of the recent run-up in food segments."

"Policymakers drew confidence from a moderation in core prints and expect a seasonal correction in food prices in Q4'23, but this was balanced with an emphasis that further action will be warranted on signs of unanchoring in inflationary expectations as well as if inflation stays above the mid-point target of 4% on a durable basis."

"The evolving inflation trend is likely to be watched closely, pushing back rate cut expectations, especially in light of a notable upward revision in the 1QFY25 inflation forecast."

SAKSHI GUPTA, PRINCIPAL ECONOMIST, HDFC BANK, GURUGRAM

"The RBI's message was hawkish as expected, reflected in the upward revision in the inflation forecast and the decision to tighten liquidity."

"We expect inflation to print at 5.6% in FY2024 on average with pressures coming in not just from vegetables (which tend to be transitory) but also cereals, pulses, and oils and fats on the back of El Nino disruptions and global food price pressures."

"Rate cut expectations have been pushed out to early FY2025."

VIVEK KUMAR, ECONOMIST, QUANTECO RESEARCH, MUMBAI

"Despite the status quo on repo rate, the RBI has emphasised its hawkish undertone by scaling back excess liquidity from the money market to ensure liquidity conditions are in sync with the anti-inflation policy stance."

"Overall, we continue to expect the MPC to remain on extended pause through the course of FY2024. This is likely to be accompanied by a hawkish undertone to allow for the complete transmission of past rate actions and also to dissuade premature market expectations of a policy pivot as long as inflation projections continue to remain above 5% on a consistent basis."

UPASNA BHARDWAJ, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

"The MPC preferred to remain on a wait-and-watch mode along expected lines. We believe the seasonal uptick along with erratic weather conditions will continue to keep the hawkish bias of the MPC intact in the upcoming meetings as well."

"However, we expect the rates to remain unchanged through the rest of the year as they evaluate the impact of earlier monetary tightening in growth and inflation."

JAHNAVI PRABHAKAR, ECONOMIST, BANK OF BARODA, MUMBAI

"(There will be) no rate action before December 2023 by RBI while they will remain data dependent going ahead, given the expectations of a spike in vegetable inflation in the coming months."

(Reporting by Ashish Chandra, Anuran Sadhu, Yagnoseni Das, Navamya Ganesh Acharya, Nishit Navin, Sethuraman N R and Hritam Mukherjee in Bengaluru and Bhakti Tambe in Mumbai; Editing by Sohini Goswami)