RBI Monetary Policy August 2023: The RBI Governor Shaktikanta Das-led monetary policy committee (MPC) on Thursday decided to keep the repo rate—or the key interest rate at which the central bank lends money to commercial banks—unchanged at 6.5 per cent in its second bi-monthly monetary policy meeting of fiscal FY23–24. In addition, the RBI projects Q2 retail inflation at 6.2 per cent; Q3 at 5.7 per cent and Q4 at 5.2 per cent in FY 2023–24.

Here is what experts, analysts, and industry leaders have to say about the August 2023 RBI Monetary Policy Review:

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Anuj Puri, Chairman, ANAROCK Group

"This is nothing but good news for aspiring homebuyers on the market for purchase in the near future. The unchanged repo rate will help maintain momentum in housing sales, particularly in the mid-and luxury segments, which did significantly well in H1 2023. As per ANAROCK Research, we saw total housing sales of approx. 2.29 lakh units across the top 7 cities in H1 2023, the highest half-yearly sales in the last decade. However, the risk of inflation continues to lurk, and if it rises further, there could be some repercussions on overall sales, especially in the cost-sensitive affordable housing segment, which has already been severely impacted by the pandemic over the last couple of years. Amidst the rising cost of these properties and the cumulative 250 bps rate hikes by the RBI in the last year and more, affordable housing buyers have taken the severest blow."

Lakshmi Iyer, CEO, Investment & Strategy, Kotak Alternate Asset Managers Limited

While the status quo on rates wasn’t much of a debate, the key thing to watch out for was the tone of the MPC guidance. Here, the RBI seems to sound cautious and ready to act as and when the situation warrants, but not as hawkish as the markets would have expected. It also suggests that many of the possible negative outcomes were already in bond prices. The CPI forecast for FY24 has been revised upward to 5.4 per cent, which again was largely priced in. The incremental CRR hike (~95,000 crore of liquidity suck out) to be temporary in nature to address liquidity addition on account of the withdrawal of Rs. 2000 notes. This could dampen short-term bond yields in the near term. Bond prices could see relief buying as the mood was quite sombre, assuming a very hawkish commentary."

Suman Chowdhury, Chief Economist, Head, Research, Acuité Ratings & Research

"The governor sounded hawkish, highlighting that headline inflation needs to subside sustainably below 4 per cent and any surge in the inflation print if continued for a longer period, may necessitate fresh action. The hawkish stance is also reinforced by the unexpected announcement of an incremental CRR (ICRR) of 10 per cent on the incremental NDTL over the last 3 months, which will help in absorbing a large part of the excess liquidity created through the return of the Rs 2,000 notes and the large dividend to the government from RBI. Nevertheless, it has been stated that the need for the ICRR will be reviewed next month and may be done away with depending on the credit requirements during the festive season.

MPC has again revised its average inflation forecast to 5.4 per cent in FY24 from 5.1 per cent earlier. Given such uncertainty on the inflation front, the likelihood of an extended pause on interest rates has been reinforced. In our opinion, any possible rate cut may not materialise before the last quarter of FY24. The liquidity will be slightly tighter than expected in the near term due to the ICRR imposition, and this may lead to some increase in short-term rates. Another encouraging development is the decision of the bank to come out with new steps to facilitate better access of funds to the infrastructure NBFCs (NBFC-IDFs) and the announcement of an open architecture for access to credit in India in the lines of ONDC."

Umeshkumar Mehta, CIO, Samco MF

“It may be a Pause, but inflation tantrums are expected to last longer than the D-Street is expecting. The vagaries of extreme climate, prolonged geopolitical wars and higher commodity prices including food, will tie the hands of central bankers across the globe in curtailing interest rates at lower levels. The outlook for Indian equities, therefore, moderates further given that the election bell will start ringing which may start weighing down from next quarter. Overall, the macros and monetary policies will dampen investor sentiments and in turn pause the equity rally going forward.”

Vikas Garg, Head of Fixed Income, Invesco Mutual Fund

"Recent uptick in food inflation is expected to be short-lived and is looked through as of now with monsoon picking up well. Stance still maintained as “withdrawal of accommodation” to keep flexibility against any negative surprises on domestic inflation. Incremental CRR requirement is a tad negative, though for a short time only. Overall, a well-balanced policy on expected lines with a remote likelihood of any more rate hikes for now. A long wait for rate cut cycle as MPC re-iterates its commitment on 4 per cent inflation target."

Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank

"The RBI kept its policy rate unchanged as expected at 6.5 per cent but its message was clearly hawkish. This was reflected in the upward revision in Q2 FY24 inflation forecast by 100bps to 6.2 per cent and the decision to tighten liquidity through the incremental CRR for banks. The latter could reduce the system liquidity balance by INR 60-70K crores. While the ICRR decision is to be reviewed in September and could be a temporary decision but if inflation pressures linger on, the possibility of continued durable liquidity tightening is likely.
The RBI reiterated its resolve to bring inflation back to 4 per cent on a sustainable basis and highlighted risks beyond the transitory vegetable price pressures. We expect inflation to average at 5.6 per cent in FY24 with inflation expected to print above 6 per cent till September."

Madan Sabnavis, Chief Economist, Bank of Baroda 

“There has been a change in inflation outlook quite significantly. Interestingly the RBI has increased the forecast to 5.4 per cent from 5.1 per cent with the second quarter inflation crossing 6 per cent (6.2 per cent). This is indicative that for the present calendar year, there is no probability of a rate cut as the inflation forecast for Q3 is placed at 5.7 per cent. The introduction of an incremental CRR, though on a temporary basis, will impound the resources of banks and have an upward impact on market rates. While there will still be surpluses in the market, the concept of impounding resources will exert upward pressure on sentiment and hence interest rates. We can assume that this will be reversed before the festival/busy season as the RBI could have gone in for OMO to permanently take out liquidity from the system.”

Rajani Sinha, Chief Economist, CareEdge Ratings

“RBI’s decision to maintain the status quo on the policy rate was on the expected lines. However, it sounded more cautious than the last two meetings, with a significant upward revision in the inflation numbers for the upcoming quarters. Given the transient nature of the seasonal shocks, the RBI will wait for more data points to evaluate the emerging inflation dynamics and will likely look through any temporary rise in inflationary pressures in the near term. With the steep upward revision in the inflation projections, the expectation of a rate cut is pushed further to the next fiscal. Additionally, the announcement of a temporary provision of incremental CRR will help remove the build-up of excess liquidity in the system.”

Churchil Bhatt, Executive Vice President & Debt Fund Manager, Kotak Mahindra Life Insurance Company

“Today’s ‘unexciting’ MPC has come as a welcome development for the markets. As expected the committee left the key policy rates unchanged along with its growth projections. While the Committee made an interim adjustment to the CPI projections, it kept the year-end projections unchanged. Going forward, the MPC will attentively watch food and energy prices, to assess their impact on inflation expectations. Reflecting the continuing innovative mindset of the Central Bank, it made an interim, albeit marginal, adjustment in CRR to address the surplus liquidity. Finally, the Central Bank continues to re-emphasise the need to achieve 4 per cent headline CPI on a durable basis, hinting at a protracted pause in policy rates.”

Ajit Kabi, Banking analyst, LKP Securities

"The inflation may not cause worries (excluding CPI). The CPI forecast for FY24 has raised to 5.4 per cent from the 5.1 per cent estimated earlier. Moreover, the real GDP growth forecast was pegged at 6.6 per cent. RBI MPC remains resolute in its commitment to align inflation with the 4 per cent target and anchor inflation expectations."

Achala Jethmalani, Economist at RBL Bank

“The MPC’s decision is seen as a ‘hawkish pause’. The RBI tinkers with liquidity to align it with the current monetary policy stance to enhance transmission of prior hikes. Upward revision in inflation forecasts while watching any persistence of idiosyncratic price spikes, strengthens the case of ‘higher for longer’, a theme that is playing out globally too. As India's CPI inflation starts tapering off in 2H FY24, we expect the repo rate to remain unchanged at 6.50 per cent. Any price shocks could alter expectations.”

Rajeev Radhakrishnan, CFA, Chief Investment Officer - Fixed Income, SBI Mutual Fund

“The focus has clearly shifted to align liquidity conditions more consistent with the policy stance. Near-term higher CPI prints are likely to be looked through on the expectation of seasonal easing later in food prices. However, the increase in FY24 CPI estimate by 30bps is significant and needs to the watched. Overall, any rate cut expectations need to be pushed back while recognising the outside risk of additional liquidity absorption measures and even policy actions down the line.”

Dhiraj Relli, MD & CEO, HDFC Securities 

"The markets did not get surprised at the outcome. The hawkish pause was widely expected with inflation assuming the center stage given the recent uptick in food prices, as seen from a sharp increase in RBI’s inflation forecast. India’s economic activity has continued to demonstrate resilience and RBI retained its GDP forecast at 6.5 per cent in FY24. Given the excess liquidity in the system, especially from withdrawal of Rs 2000 notes; RBI directed scheduled banks to maintain an incremental CRR of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023 to absorb the surplus liquidity. Post this announcement, Bank Nifty slipped into weakness as this announcement is negative for Banks. Higher forecast of inflation also doused hopes of an early beginning of rate cut impacting Bank stocks." RBI is expected to maintain close vigil on the evolving inflation outlook and is focused to keep inflation expectations firmly anchored at its primary target of 4 per cent, though the task seems daunting. We think the central bank seems to have fewer concerns about growth rather than uncertainty around the inflation outlook. We expect rate cut perhaps in Q1FY25 but that would be data dependent."

Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life

“The liquidity surplus is around Rs. 2 lakh crore presently, as a result of the return of 2000 denomination rupee notes to the banking system, withdrawn earlier. Therefore, the RBI introduced a temporary incremental CRR (ICRR) of 10 per cent on incremental NDTL between mid-May and July 2023, and it will be reviewed on September 8, 2023—ahead of the festival season. The central bank also introduced a transparent framework for resetting interest rates for floating rate loans, which will bring some uniformity, and is a positive step for borrowers. Given the recent inflationary pressures in India (due to higher vegetable and cereal prices), elevated global monetary policy outlook, and RBI’s commitment to bring down domestic inflation to 4 per cent; rate cut expectations have been further pushed back and will depend on evolving data. Short term rates may see some upward pressure in the near term due to ICRR steps. We are presently positive on the medium to long term part of the yield curve.”

Read more — RBI MPC Meeting LIVE Updates: Shaktikanta Das-led MPC keeps repo rate on hold, maintains 2023-24 GDP projection. Catch the latest minute-by-minute stock market updates here.