RBI MPC view: RBI increased rates by 25bp (expected) unanimously
MUMBAI, 7 OCTOBER: RBI did not announce any liquidity absorption methods like CRR etc. (expected by us). As we mentioned, the current tools for liquidity absorption should continue. And in next 6 months, in natural course of liquidity will lead to less surplus. RBI stated concerns about “sudden reescalation” of Iran war since last policy.
On Inflation: Negative
RBI stated comfort on supply side inflation (second order) still not percolated… – “there are limited signs of supply side pressures getting embedded in pricing behaviour. ” …But worried about oil and food prices. – “The near-term outlook on inflation points towards continued pressures from supply side”
…And a conviction that inflation will move higher
– “it is clear that inflation and its outlook are not benign as they were last year”
Our view: RBI is not as uncomfortable on inflation as we would have thought. This confirms that RBI is in wait and watch. However, if Iran war continues even a quarter more, we believe that second order impact will occur. A decade back RBI’s research reports had stated the second order oil impact can be three times the first order. The risk remains.
On Growth: Neutral
Economic activity remains strong “Growth was driven by resilient private consumption and strong investment activity”….
…But risk that growth will not remain so strong
“Economic activity is holding momentum in Q2, albeit with some moderation compared to the preceding quarter”
But not withstanding usual concerns, RBI seems comfortable on growth.
Our View: Growth is robust, with risks. We believe this is the least of decision driver for RBI.
On currency: Neutral
On Rupee , RBI stated curtailed CAD – with risk to widening…
– “uncertainties pose upside risks to India’s current account deficit in 2026-27”
…RBI also stated marginally better FDI.
Our view: But RBI has never sounded negative on currency, especially in bad times. We still believe that FX flows remain the largest concern for RBI.
Highlights of policy:
The Monetary Policy Committee (MPC) voted unanimously to increase the policy repo rate by 25 basis points to 5.50%.
The policy stance has been changed to calibrated tightening, signalling that rate cuts are off the table in the near term.
Real GDP growth for the full financial year 2026-27 is projected at 7.1% (with Q2 at 7.2%, Q3 at 6.9%, and Q4 at 6.8%).
CPI inflation for 2026-27 is projected at 5.2%, with upcoming quarters expected to face continued supply-side pressures (Q3 at 6.0% and Q4 at 5.7%).
Global economic activity remains in flux due to geopolitical conflicts in West Asia, volatile crude oil prices, and hawkish shifts by major central banks like the US Fed.
Two members (Dr. Nagesh Kumar and Prof. Ram Singh) expressed the view that the monetary policy stance should have been retained as neutral instead of calibrated tightening.
On Liquidity, Governor mentioned that Reserve Bank will use an appropriate mix of liquidity management tools and strive to align the weighted average call rate (WACR) with the policy repo rate.
In Q&A Governor mentioned that calibrated tightening meant milder form of tightening – not necessarily that rate hikes are given.
In Q&A Governor also mentioned that while no action is rules out, but CRR hike will be the least preferred option. The currency leakage and FX will automatically lead to lower liquidity.
by Sandeep Yadav, Executive Director and Head of Fixed Income, DSP Mutual Fund
(Disclaimer: The information provided here is investment advice only. Investing in the markets is subject to risks and please consult your advisor before investing)
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