- Monsoon picked up in September after a pause in August and has led to good rainfall this year. This has already led to record kharif food grains as per advanced estimates and with water reservoir levels at 80% of full capacity, is expected to boost Rabi production prospects.
- A good monsoon will lead to good rural demand and will keep food inflation in check in short term.
- Both Manufacturing and Service PMI have also stayed in positive territory in September. This along with high frequency indicators suggests normalization of economic activity post second Covid wave.
- Core inflation which has eased to 5.3% in August is also expected to soften in coming months with ease of food prices. However, some pressure will remain due to crude oil prices, which have touched a new 52-week high on the MCX in September.
- Number of positive indicators, especially on inflation front, allows RBI to maintain low repo rate unchanged at 4.0%, reverse repo rate at 3.35% and bank rate at 4.25% and continue with the accommodative stance. It seems that lower interest rates will continue for the time being.
- RBI also has reasons to continue with the accommodative stance as the aggregate demand still has some slack and output is still below the pre-pandemic levels.
- However, RBI has started taking the first steps towards normalising by plans to reduce the surplus liquidity from the system.
- It has now shifted its liquidity management from active to passive style where market will determine the rate at which the RBI will absorb the liquidity in 14 days variable rate reverse repo (VRRR) auctions. VRRR auctions are a tool available to RBI for rebalancing the liquidity and VRRR is a rate at which RBI absorbs excess liquidity from the system. We can expect that the RBI will reduce the excess liquidity from the system in coming months in a phased manner.
Acknowledgements:
RBI Bulletin (www.bulletin.rbi.org.in), SEBI (www.sebi.gov.in), NSE (www.nseindia.com), BSE (www.bseindia.com)
Disclaimer:
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