RBI Guides For Key Policy Rates To Stay Higher For Longer

The decision of the Monetary Policy Committee (MPC) to maintain the current key policy rates came as anticipated. Recent declines in agro-commodity prices provided the MPC with some flexibility in the short term. However, it’s important to emphasize that the Reserve Bank of India (RBI) underscores that this should not be misconstrued as a relaxation of the central bank’s vigilance against inflation. The governor reiterates the commitment to achieving the headline Consumer Price Index (CPI) target of 4%, rather than merely bringing inflation within the tolerance band of 2-6%.


The RBI has kept its CPI forecast for FY2023-24 steady at 5.4%. Notably, the RBI’s CPI forecast of 6.4% for Q2FY24 implies that retail inflation could soften to around 5% in the September reading, signifying a decrease of about 180 basis points from the previous monthly reading. The central bank envisions retail inflation further softening to approximately 4.5% during FY25.

The growth projection for FY24 remains unaltered at 6.5%, with the RBI expecting sustained buoyancy in services, a revival in rural demand, consumer and business optimism, the government’s focus on capital expenditure, and healthy balance sheets of banks and corporates to be the drivers of growth. Despite optimistic domestic growth prospects, the RBI acknowledges the necessity of closely monitoring the domestic growth trajectory in the coming quarters, given potential weather-related shocks to crop output, global financial tightening, and the impacts of domestic policy transmission.

The RBI has affirmed the robustness of the financial sector balance sheet. However, it has raised concerns about the sharp increase in unsecured personal loan growth and is actively monitoring the retail credit landscape for early signs of strain. Recent data from the RBI indicates a year-on-year growth of over 30% in the personal loans segment. Similar to the previous policy meeting, the RBI has reiterated its commitment to actively managing surplus liquidity when necessary. This, coupled with the RBI’s narrative of a higher-for-longer policy rate, is expected to facilitate further policy transmission during the ongoing tightening cycle, supported by the sustained resilience of the domestic economy. The RBI remains vigilant regarding liquidity and inflation dynamics.

On the global front, the macroeconomic landscape remains intricate. Inflation and central bank policy rates seem to have peaked in several countries, while economic activity shows variations across economies. While macroeconomic data still suggest a healthy economy, there are signs of a slowdown. Conversely, macroeconomic indicators in the Euro Area are sharply decelerating, marked by declining consumer sentiment and weakening in the manufacturing and services sector.

In its September policy, the US Federal Open Market Committee (FOMC) maintained interest rates but adopted a hawkish tone. They signaled another rate hike in the Fed Funds Rate in 2023 and fewer cuts next year than previously indicated. Recent remarks by Fed officials have introduced uncertainty regarding the terminal Fed funds rate, although there seems to be a consensus favoring higher rates for an extended period. Currently, US markets assign approximately a 35% chance of at least one more hike by the Fed in 2023. Lately, there has been a notable increase in volatility in global financial markets, evident in the rising VIX and a remarkable surge in global yields over the past weeks. The US 10-year yield has seen an uptick of more than 50 basis points since August, reaching its highest levels in 16 years. Moreover, the 30-year yield briefly exceeded the 5% mark, a milestone not observed since August 2007.