The RBI policy committee’s off-cycle on Thursday was a non-event as intended and expected. In the run-up, Governor Das (at a speech at a private sector event) had emphasised that the meeting was intended to draft and prepare a letter to the government to explain the miss of inflation target (see our note here). Contents of the letter have not been made public but might be released eventually. At the event, he reiterated that factors behind the liquidity squeeze (see here) were temporary, including festive-driven currency demand, tax outflows, delayed government spending and FX operations. As these drivers abate, especially a resumption in government expenditure and slowing interventionist presence, cash conditions would normalise. Strong pick-up in credit growth pick-up and lag in deposits have pushed up the incremental credit deposit ratio to north of 100%. Adjusted for inflation, real credit growth is around 9-10% yoy region. For now, while this credit-deposit gap is being filled by relying on short-term credit, tapping the marginal standing facility window and/ utilising excess holdings under the statutory liquidity ratio requirement, with deposit rates set to rise further for a more durable cushion.
Attention returns to the scheduled Dec rate review. Minutes of the Oct meeting (see here) highlighted a divergence in views amongst the committee members along the lines of growth, inflation, and financial stability. Governor Das’s view that inflation of about 6% was seen as detrimental to growth, keeps him on the hawkish end of the spectrum. Notwithstanding a pullback in Oct inflation, out in mid-Nov, we expect the RBI to undertake a 35bp hike in Dec and 25bp in Feb in this cycle. Apart from inflation, rupee stability will also be in focus of the authorities. Separately, the RBI launched a pilot program of the digital currency this week for wholesale purposes, under which select banks (mix of public and private sector) were allowed to use the e-rupee to settle secondary market transactions in government securities. On the first day, INR2.7bn worth bonds were traded, less than 2% of normal volumes.
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