Dr. Esha Khanna, Assistant Professor at Sarla Anil Modi School of Economics, NMIMS
MPC’s adjustment in monetary policy to neutral is much needed and exhibits a balanced outlook on inflation and growth. Revised upward growth forecasts, downward adjustments of headline inflation toward the target, sufficient liquidity conditions, diminished volatility in the rupee, and robust external demand are several positive factors. Moving forward, decisions regarding rate cuts will be contingent on changing inflation dynamics, as core inflation has increased. There is a considerable risk related to food and metals, with uncertainty arising from volatile global factors, as highlighted in today’s policy statement. The RBI may postpone a rate cut by an additional quarter if upside risk to inflation continues, though real policy rates currently hover around 2 percent. Despite high real policy rates, Investment demand is at a decadal high, indicating that investment is propelled by robust economic demand and favorable production conditions owing by a gradual reduction in inflation rather than by alterations in interest rates. Overall, the shift in stance to neutral has created opportunities for a rate cut in the near future, which is expected to affect bond yields and likely result in a bullish market in the short term.
However, a subtle reminder to non-banking financial companies (NBFCs) to thoroughly assess their exposures in unsecured segments was essential, as NBFCs play a crucial role in financing MSMEs and have experienced significant growth in rural, small-scale, and unbanked sectors. These cover the varied financial requirements of the Indian economy, propelled by growth in lending, credit, and vehicle financing. Consequently, non-banking financial companies (NBFCs) must exercise greater caution as they experience larger balance sheets and an influx of public funds.
Nishant Srivastava CEO of Torus Wealth:
Decision to maintain the repo rate at 6.50% aligns with expectations and demonstrates a continued focus on managing inflation.
While neutral stance suggests a cautious approach to future monetary policy.
Given the ongoing geopolitical tensions and global economic uncertainties, the RBI’s decision to prioritize inflation control is prudent.
Its important to monitor economic indicators closely to assess the impact of this policy on growth and development.