The Reserve Bank of India (RBI) shall announce the latest monetary policy stance of its Monetary Policy Committee (MPC). While the market narrative is focusing on the decision regarding change in the policy rates, I believe the decision “to hike or not to hike” may not be the primary point of deliberations over the past two days.
In the past seven months since May 2022, RBI has hiked the key policy repo rate by 190bps. The benchmark bond yields or lending rates have not risen in tandem to the policy rates. Only the call money rates and bank deposit rates have seen a corresponding rise. This could mostly be a function of sharp rise in credit growth (now above 18%) at a time when RBI had reversed its accommodative stance and withdrawn over INR12trn of surplus liquidity from the market
The benchmark 10yr treasury yields have fallen 25bps in the past six months. However, 3-6months bond yields have seen sharp rise of 135bps and 112bps respectively.
The hike in repo rate has been only partly transmitted to the markets in terms of lending rates. The base rate of banks has risen from 7.25%-8.8% (in the week ending 06 May 2022) to 8.10% - 8.80% (in the week ending 02 December 2022). MCLR of banks has changed from 6.50% - 7.00% to 7.05% - 8.05% during this period. Savings bank rates (Nil change) and small savings rates have hardly moved in this period. However, the bank deposit rates have grown much faster from 5.00-5.6% to 6.1% - 7.25% during this period.
The call money rates have risen from an average of 3% to 5% during this period.
From the above it appears that it is the withdrawal of accommodation (liquidity) that may have impacted the money market rather
The monetary tightening in the past seven months does not appear to have material impact on the price level, which continues to remain elevated, led by energy and food. Of course, the monetary policy measures usually impact the prices with some time lag and we may see the prices correcting going forward.
However, what may worry MPC is that the growth is already showing signs of slowing. Negative real rates on deposits are hurting savings. There is not much evidence of rising rates destroying consumption so far, but we may see it going forward. The global commodities appear to have bottomed and a China reopening is seen as a trigger for rise in commodity prices, despite slowing global growth. The rising external vulnerabilities might keep USDINR under pressure, keeping imported inflation high. Obviously, MPC cannot ignore the actions of the Fed and the narrowing gap between India and US risk free yields.
Besides, MPC must have given a roadmap to the government to bring inflation within its tolerance band of 4-6% last month. The statement today might echo the commitments made in the letter written to the government last month.
So, MPC would have deliberated how to find equilibrium between liquidity, inflation, growth, external stability (Fx reserve, flows, USDINR, export competitiveness), financial stability and also political expediency.
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