RBI MPC meet: Brace for 'prolonged' repo rate pause at 6.5%, says SBI

The Reserve Bank of India (RBI) is expected to go for a "prolonged pause" during the upcoming monetary policy committee (MPC) meeting in October as the "seasonality of inflation" is tapering, SBI Research says in its latest Ecowrap report. RBI Governor Shaktikanta Das-led six-member MPC meeting is scheduled for October 4-6 2023.

The policy meeting could see the central bank continuing with the "withdrawal of accommodation" stance as inflation is "unlikely" to tread below 5% in the rest of the fiscal year FY 2023-24. On the repo rate, the SBI report highlights the recessionary fears in the USA could have another ramification -- reset of a sizeable amount of loans taken to finance house purchases through the pandemic. 

The RBI's MPC had kept the repo rate unchanged at 6.5% in its third policy statement in August, maintaining the status quo on the key policy rate for the third consecutive time. The rate-setting panel had paused the rate hike in April this year. The repo rate was also left unchanged in June. The MPC’s policy stance also remained focussed on "withdrawal of accommodation" to ensure inflation aligns with the target of 4% while supporting growth. 

On risks for growth or inflation, SBI Research says the growth outlook continues to be strong. "Spiralling oil prices should take a breather at these levels as vocal members of OPEC+ may not like to destabilise the markets further in the long run beyond 90/bbl."

The report also talks about US-based commercial bank JP Morgan Chase's decision to add Indian Government Bonds to its benchmark Emerging Market Index Global Diversified (GBI EM GD). 

India will have a maximum weight of 10 on the index JP Morgan said 23 Indian government bonds, with a combined notional value of $330 billion are eligible for the inclusion.

"Choosing the JPM GBI EM could be a deliberate move on the part of GoI/RBI to ensure future developments have a natural progression, evolving and maturing organically to mitigate possible points of friction. Add to this the third index, the Bloomberg Barclays EM bond index, and the funds flow numbers significantly go up!"

A rough estimate from the current ownership pattern of the government of India securities suggests a $24 billion gap. "We believe yields could touch 7% even before March of the current fiscal and should affirmatively breach 7% in FY25. Demand for G-sec could now outstrip Supply of G-sec. This could be a new turning point in the G-sec market in India where supply has traditionally outstripped demand for G-sec."

On liquidity management in the wake of 24x7x365 banking, the SBI report says the demand for liquidity is turning more on-tap, given a 24/7 payment system, while the supply of liquidity is a constellation of several autonomous factors. Notably, FY24 started with a "liquidity surplus" as given by net durable liquidity of around Rs 1 2 lakh crore, which declined gradually to around ₹90 000 crore by mid-May 2023.

Since the liquidity has now reduced, the RBI has decided to gradually remove the ICRR, and free up capital for banks. However, the system liquidity deficit has again increased in recent days, says SBI.