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Déjà vu from RBI? Jamke Rakhna Kadam, dear MPC members!

By Lakshmi Iyer

The much-awaited MPC (Monetary Policy Committee) meeting of RBI got under way on Wednesday, October 7, and the outcome is expected on Friday, October 9.

The suspense following the decision to defer the MPC meet was nothing short of Bollywood suspense thriller – trying to guess who the new MPC members would be, the likely timing of the policy review, the posturing of new members etc.

With the announcement of the new MPC members and the policy date, at least that uncertainty is now gone. It still leaves room for conjecture with regard to the thought process the newly-inducted members are going to bring in.

For this, we need to reflect on how the macros have behaved so far since the MPC last met. How different have been things globally today vis-à-vis two months back. For starters, consumer price index (CPI) still continues to be elevated. The last reading (August CPI) came in at 6.69 per cent and the readings prior to that too were high. The MPC meeting precedes September CPI announcement – which should be small relief for the market, as the Sept print too may not show any sign of relief. Prices of vegetables, especially tomato, onion and potato, continued to rise in September as well, implying that food inflation may remain sticky.

Apart from this, nascent signs of growth momentum picking up is visible. Manufacturing PMI (Purchase Managers Index) improved to 56.8 in September from 52 in August. Likewise, services sector PMI has also shown improvement. GST collection for September has too shown a smart comeback.

While these are clear positives, the fact remains that comfortable banking system liquidity has not led to commensurate credit growth by banks. While deposit growth is in double digits, aggregate credit growth is still in single digits. Solution to the medical crises is far from available. Most developed economies are either at zero or negative interest rates. The US Fed has announced its intent to pursue ZIRP (zero interest rate policy) till 2023!

In view of the above, it is most likely that we see a déjà vu – status quo on rates with an ‘accommodative’ bias on October 9. Markets would also be keen to see if some unconventional or untested measures are likely to be taken as we ruminate over an extended pause.

MPC members would ideally be looking through the current phase of elevated inflation and seek spaces for policy maneuverability. Till then, markets will sing to the MPC members “
Jamke Rakhna Kadam… (keep a firm foot forward)”

(Lakshmi Iyer is Chief Investment Officer (Debt) & Head of Products, Kotak Mahindra Mutual Fund)

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