Macroeconomic stability and inclusive growth are essential for a country’s progress. India’s policy mix has fostered macroeconomic and financial stability, and the external sector remains manageable. India is poised to become the new growth engine of the world, but it is important to remain vigilant and not give room to complacency. High inflation is a major risk to macroeconomic stability and sustainable growth, so the Reserve Bank’s monetary policy remains focused on aligning inflation to the 4% target on a durable basis.
MPC’s rationale for its decisions on the policy rate and the stance– The MPC noted that headline inflation had surged in July, but is expected to ease in the coming months. However, the overall inflation outlook is uncertain due to factors such as the fall in kharif sowing, low reservoir levels, and volatile global food and energy prices. Economic activity, on the other hand, has remained resilient. Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points which is still working through the economy, the MPC decided to keep the policy repo rate unchanged. The MPC also decided to remain focused on withdrawal of accommodation, as the transmission of the 250 basis points increase in the policy repo rate to bank lending and deposit rates is still incomplete. The MPC remains highly alert and prepared to undertake timely policy measures, as may be necessary, in order to align inflation to the target and anchor inflation expectations.
|Policy Repo Rate||6.50%||6.50%|
|Standing Deposit Facility Rate||6.25%||6.25%|
|Marginal Standing Facility Rate||6.75%||6.75%|
Decisions and Deliberations of the Monetary Policy Committee (MPC):
The policy repo rate will remain at 6.50%, the standing deposit facility (SDF) rate will stay at 6.25%, the marginal standing facility (MSF) rate and the Bank Rate will remain at 6.75%, Repo Rate saw an increase of 250 bps (It was 4% In April 2022 & it’s 6.5% now).
MPC decided to focus on withdrawing accommodation to help align inflation with the target while still supporting growth.
Assessment of Growth:
- Global Economy:
The global economy is slowing due to tight financial conditions, geopolitical tensions, and geo-economics fragmentation. Global trade is contracting, and headline inflation is easing but still above target in major economies. Major central banks are signaling a peaking of their rate hike cycle, but the tight monetary policy stance could persist for longer than anticipated.
The domestic economy in India is resilient, with strong domestic demand supporting industrial sector recovery and investment activity. Services sector activity is also maintaining buoyancy, and rural demand is showing signs of revival. Looking ahead, domestic demand conditions are likely to benefit from sustained buoyancy in services, consumer and business optimism, the government’s continued thrust on capex, healthy balance sheets of banks and corporates, and supply chain normalization. However, there are some headwinds to growth, including geopolitical tensions and geo-economics fragmentation, volatility in global financial markets, global economic slowdown, and uneven monsoon. Overall, the outlook for the Indian economy is positive, but it is important to be mindful of the risks posed by the global environment.
Assessment of Inflation:
- Inflation in India:
Inflation in India was high in July and August, at 7.4% and 6.8%, respectively. This was largely driven by food prices, especially vegetables. Vegetables have a weight of around 6% in the CPI basket, and they contributed to about one-third of CPI headline inflation in July and to around one-fourth of overall inflation in August. Sustained inflationary pressures in cereals, pulses, and spices added to the overall food inflation. On the positive side, core inflation softened to 4.9% during July-August 2023. It has eased by around 140 basis points from its recent peak in January 2023. Further disinflation of the core component is critical for price stability.
- Outlook for 2023-24:
While near-term inflation is expected to soften on the back of vegetable price correction, especially in tomatoes, and the reduction in LPG prices, the future trajectory will be conditioned by a number of factors. For Kharif crops, the area sown under pulses is below the level a year ago. Kharif onion production needs to be watched closely. Demand-supply mismatches in spices are likely to keep these prices at elevated levels. The inflation trajectory will also be shaped by El Niño conditions and global food and energy prices. Together with global financial market volatility, these factors pose risks to the outlook.
RBI’s GDP and CPI Estimates:
|GDP Current Estimates||GDP Previous Estimates||CPI Current Estimates||CPI Previous Estimates|
Liquidity and Financial Market Conditions:
- Surplus Liquidity in the System:
The RBI is concerned about the skewed liquidity distribution in the banking system, with banks preferring to place funds under the overnight SDF instead of offering them in the main 14-day VRRR operations. The RBI is urging banks to assess their actual liquidity requirements over the reserve maintenance cycle and bid accordingly in the auctions under main 14-day VRRR operations. It is also desirable that banks having surplus funds explore lending opportunities in the inter-bank call market rather than passively parking funds in the SDF at relatively less attractive rates. The RBI may have to consider OMO-sales (Open Market Operation sales) to manage liquidity in the future, consistent with the stance of monetary policy. The timing and quantum of such operations will depend on the evolving liquidity conditions.
- Financial Market Conditions:
The Indian banking system continues to be resilient, backed by improved asset quality, stable credit growth, and robust earnings growth. The credit growth is broad-based and backed by the strong fundamentals of financial institutions. The financial indicators of non-banking financial companies are also in line with that of the banking system. Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress.
- Current Account Deficit (CAD):
The current account deficit (CAD) for Q1:2023-24 declined to 1.1% of GDP from a year ago. There was an accretion of US$ 4 billion to foreign exchange reserves on the balance of payments (BOP) basis during Q1:2023-24.
- Foreign Financing:
FPI flows have seen a significant turnaround in 2023-24 with net FPI inflows at US$ 20.3 billion up to September 2023 as against net outflows in the preceding two years. Net FDI, on the other hand, moderated to US$ 5.8 billion in April-July 2023 from US$ 17.3 billion a year ago. The inflows under external commercial borrowings (ECBs) witnessed a turnaround, with net inflows of US$ 4.5 billion during April-August 2023 as against net outflows of US$ 3.2 billion a year ago. The number and total amount of ECB agreements grew markedly during April-August 2023 with about 60% of the total amount being raised for capital expenditure. External vulnerability indicators also indicate lower vulnerability in comparison with EME peers. India’s foreign exchange reserves stood at US$ 586.9 billion as of September 29, 2023.
Source: RBI Press Releases
Disclosure in pursuance of Section 19 of SEBI (RA) Regulation 214
Elite Wealth Limited does/does not do business with companies covered in its research reports. Investors should be aware that the Elite Wealth Limited may/may not have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only information in making their investment decision and must exercise their own judgment before making any investment decision.
For analyst certification and other important disclosures, see the Disclosure Appendix, or go to www.elitewealth.in. Analysts employed by Elite Wealth Limited are registered/qualified as research analysts with SEBI in India. (SEBI Registration No.: INH100002300)
Analyst Certification (For Reports)
Kiran Tahlani, Elite Wealth Limited, email@example.com
The analyst(s) certify that all of the views expressed in this report accurately reflect my/our personal views about the subject company or companies and its or their securities. I/We also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Elite Wealth Limited.
As to each individual report referenced herein, the primary research analyst(s) named within the report individually certify, with respect to each security or issuer that the analyst covered in the report, that:
- all of the views expressed in the report accurately reflect his or her personal views about any and all of the subject securities or issuers; and
- No part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in the For individual analyst certifications, please refer to the disclosure section at the end of the attached individual notes.
This note may include excerpts from previously published research. For access to the full reports, including analyst certification and important disclosures, investment thesis, valuation methodology, and risks to rating and price targets, please visit www.elitewealth.in.
Important disclosures, including price charts, are available and all Elite Wealth Limited covered companies by visiting https://www.elitewealth.in, or emailing firstname.lastname@example.org with your request. Elite Wealth Limited may screen companies based on Strategy, Technical, and Quantitative Research. For important disclosures for these companies, please e-mail email@example.com.
Options related research:
If the information contained herein regards options related research, such information is available only to persons who have received the proper option risk disclosure documents. For a copy of the risk disclosure documents, please contact your Broker’s Representative or visit the OCC’s website at https://www.elitewealth.in
All research reports made available to clients are simultaneously available on our client websites. Not all research content is redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your respective broker’s sales person.
Ownership and material conflicts of interest Disclosure
Elite Wealth Limited policy prohibits its analysts, professionals reporting to analysts from owning securities of any company in the analyst’s area of coverage. Analyst compensation: Analysts are salary based permanent employees of Elite Wealth Limited. Analyst as officer or director: Elite Wealth Limited policy prohibits its analysts, persons reporting to analysts from serving as an officer, director, board member or employee of any company in the analyst’s area of coverage.
Country Specific Disclosures
India – For private circulation only, not for sale. Legal Entities Disclosures
Mr. Ravinder Parkash Seth is the Managing Director of Elite Wealth Ltd (EWL, henceforth), having its registered office at Casa Picasso, Golf Course Extension, Near Rajesh Pilot Chowk, Radha Swami, Sector-61, Gurgaon-122001 Haryana, is a SEBI registered Research Analyst and is regulated by Securities and Exchange Board of India. Telephone: 011-43035555, Facsimile: 011-22795783 and Website: www.elitewealth.in
EWL discloses all material information about itself including its business activity, disciplinary history, the terms and conditions on which it offers research report, details of associates and such other information as is necessary to take an investment decision, including the following:
- a) EWL or his associate or his relative has no financial interest in the subject company and the nature of such financial interest;
- EWL or its associates or relatives, have no actual/beneficial ownership of one %. or more in the securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance;
- EWL or its associate or his relative, has no other material conflict of interest at the time of publication of the research report or at the time of public appearance;
- EWL or its associates have not received any compensation from the subject company in the past twelve months;
- EWL or its associates have not managed or co-managed public offering of securities for the subject company in the past twelve months;
- EWL or its associates have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months;
- EWL or its associates have not received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months;
- EWL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research
- In respect of Public Appearances
- EWL or its associates have not received any compensation from the subject company in the past twelve months;
- The subject company is not now or never a client during twelve months preceding the date of distribution of the research report and the types of services provided by EWL