RBI policy reaction: Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank

10 Aug 2023 , 12:25 PM

The RBI kept its policy rate unchanged as expected at 6.5% but its message was clearly hawkish. This was reflected in the upward revision in Q2 FY24 inflation forecast by 100bps to 6.2% and the decision to tighten liquidity through the incremental CRR for banks. The latter could reduce system liquidity balance by Rs. 60-70K Crore. 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% on a sustainable basis and highlighted risks beyond the transitory vegetable price pressures. We expect inflation to average at 5.6% in FY24 with inflation expected to print above 6% till September.