June 2024 Monetary Policy Review.

 The June monetary policy review by the Reserve Bank of India (RBI) adhered to its existing stance, maintaining interest rates and policy direction. However, the review was marked by two dissenting voices. External member Dr. Goyal joined Prof. Varma in advocating for a rate cut and a shift to a neutral stance. Despite these dissensions, the Governor's tone and the policy statement remained conventional, acknowledging the dual risks to inflation while slightly raising the growth expectation for the current financial year.

An intriguing highlight of the review was the introduction of aspirational goals for RBI@100. The RBI outlined two primary objectives:

1. Monetary Policy and Liquidity Management
2. Capital Account Liberalization and Internationalization of the Indian Rupee

Assessing the RBI

The RBI operates as a conventional inflation-targeting central bank, a crucial context for its assessments. Given that inflation remains above target with component volatility, and growth is steady, dovish commentary from the RBI is unlikely. The concerns about inflation risks are routine and do not signal any shift. A change in the RBI's commentary or stance would likely precede achieving the actual 4% target, contingent on clearer inflation pathways and reduced component volatility, especially in food prices. Moreover, the required evidence for subsiding component volatility might be lowered if growth momentum falters. Since current growth is stable, the RBI's focus remains predominantly on inflation.

It's important to recognize that GDP levels are still recovering from pandemic impacts, as Deputy Governor Patra highlighted in the press conference. This perspective is vital in evaluating the potential for a growth slowdown to influence the RBI's policy decisions. Notably, the RBI could begin rate cuts even with over 7% growth if inflation stabilizes, as there remains a need to recover lost growth.

Liquidity Management and Credit Growth

The entire rate hike cycle has unfolded in a context of surplus liquidity. The RBI's liquidity framework has shifted from targeting the system liquidity quantum (as a percentage of net demand and time liabilities of banks) to anchoring the overnight rate at policy rate levels using variable rate operations. This shift aimed to enhance the transmission of previous policy hikes to bank lending rates, driven by higher liability-side rates. Without further rate hikes, stringent liquidity management becomes the central tool for the RBI. Concerns have been raised about the pace of credit growth compared to other nominal economic variables, particularly in specific lending pockets where macro-prudential tools were subsequently applied. Recent evidence indicates a slowdown in credit growth in these areas. If this trend persists, the RBI may become more lenient regarding excess liquidity in the system in the coming months.

Conclusion

The June monetary policy review reflects the RBI's careful balancing act in addressing inflation risks while supporting growth recovery. The inclusion of dissenting opinions suggests an ongoing debate within the committee about the appropriate policy stance. As the RBI navigates the post-pandemic economic landscape, its focus remains firmly on inflation management, with a watchful eye on credit growth and liquidity dynamics. The aspirational goals set for RBI@100 underscore its forward-looking approach, aiming to enhance monetary policy and liquidity management while progressing toward capital account liberalization and the internationalization of the Indian Rupee.