Hawkish Hold

The Reserve Bank of India-led rate-setting maintained a status quo policy on rates for the fourth time in the row in its October 2023 monetary policy. It kept the repo rate unchanged at 6.5% on the back of elevated retail inflation and certain global factors including elevated crude oil prices in the international market. The standing deposit facility rate and the marginal standing facility rate were left unchanged at 6.25% and 6.75%, respectively. The MPC also decided to remain focused on withdrawal of accommodation with an aim to align inflation to the target on a durable basis while supporting growth.

The meeting was in the backdrop of the overall inflation outlook being clouded by uncertainties by fall in kharif sowing, lower reserve oil levels and volatile global food and energy prices. This is the fourth month when inflation has come in higher than the upper bound of the Reserve Bank of India’s (RBI) tolerance level. The RBI pointed out that heightened inflation levels were largely driven by food prices. Vegetables contributed to a third of CPI inflation in the month of July and a fourth in the month of August. RBI governor Shaktikanta Das said that the monetary policy has to be in absolute readiness to avoid spillovers from oil shocks. He also added that further easing in core inflation is required, with the future trajectory of inflation to be determined by several factors. Inflation trajectory will also be impacted by El Nino and global food price outlook. The governor emphatically reiterated that the RBI’s inflation target was 4% and not 2-6%, with a view to remain vigilant of the evolving inflation dynamics.

While there was softness in the tone as regards the inflation forecast for the year, the overall stance was nowhere near dovish. The governor observed that the moderation in system liquidity has led to greater recourse of Marginal Standing Facility (MSF) by banks, resulting in a skewed liquidity distribution among banks. He emphasized the need to manage liquidity as required.

India is poised to become new growth engine of world. Domestic economy exhibits resilience on back of strong demand.

- RBI Governor Shaktikanta Das

GDP growth for 2023-24 retained at 6.5%.
CPI Inflation for 2023-24 retained at 5.4%.        

GDP growth for 2023-24 retained at 6.5%. CPI Inflation for 2023-24 retained at 5.4%.

Observations on Economic Activity

• Economic activity continues to be resilient.
• India’s manufacturing activity rose at the slowest pace in five months in September, but it remained solid, with strong demand driving business confidence to its highest level this year, despite increased inflationary pressures, according to the S&P Global Purchasing Managers’ Index (PMI).
• In September, the services sector in India witnessed its highest growth rate in 13 years, primarily driven by a substantial surge in new business opportunities due to robust demand conditions. Rural demand has also shown signs of revival. Additionally, employment numbers continued to rise as overall business sentiment improved during the month.
• The RBI said that the banking system continues to be resilient. Financial indicators of NBFCs are in line with the banking system, as per the latest data in June.
• Government continues thrust on capex Private sector capex is gaining ground as suggested by production of capital goods.
• The current account deficit for the first quarter of the current financial year 2023-24 declined to 1.1% of GDP from a year ago.
• India’s forex reserves remained at USD 586.9 bn as of 29th September.

As expected, the RBI is likely to prioritise supporting economic growth, especially during the festive season, while remaining cautious about inflation. The status quo in policy rate may augur well for the real estate sector - especially residential - in the backdrop of the growing sales momentum. The combination of steady interest rates and the ongoing festive season sentiment is expected to boost the sales momentum further. ?

Impact of the Repo Rate Hike

The Street was expecting a status quo on interest rates and hence rate sensitive segments like banking, auto, realty and consumer durable segments had started to give big movement ahead of meeting.

Markets held steady, and Sensex jumped 350 points immediately after the announcement. Stocks in the rate sensitive sectors like banking, auto and real estate responded positively.

India’s 10-year government bond yield, however, rose 15 bps to 7.36% in the afternoon trade - the biggest single-day rise since 5th August – after the RBI Governor announced that the central bank may consider OMO sales of government securities to manage liquidity consistently.

At Closing Bell: Indian benchmark held gains and the benchmark indices ended higher. At close, the Sensex was up 364.06 points or 0.55% at 65,995.63, and the Nifty was up 107.70 points or 0.55% at 19,653.50. All the sectoral indices ended in the green with the realty index up 3%, while Information Technology, FMCG, Metal, Auto, Power, Healthcare up 0.4-1%. Broader indices performed in line with main indices with BSE midcap and smallcap indices rising 0.5% each. The yield on India's benchmark 10-year government bond settled at 7.33% and Indian rupee ended flat at 83.24 per dollar versus previous close of 83.25.

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