India rates: RBI balance sheet, policy review to matter more than GDP
Markets priming for a RBI pause next week with a potential change in policy stance
Group Research - Econs, Radhika Rao31 May 2023
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Of the two developments that are expected to add liquidity back into the banking system i.e., withdrawal of high-value banknotes (see here) and surplus transfer by the RBI, more details on the latter was available from the central bank’s balance sheet out yesterday. The RBI had announced plans to transfer INR874bn (0.3% of GDP) to the government’s coffers, higher than last year’s INR303bn as well as FY24’s budgeted numbers. This surplus was a function of higher income (47% jump) from favourable FX moves (sales vs acquisition $/INR rate) alongside higher interest income from debt investments (domestic and foreign), which helped offset shortfall on account of liquidity operations. The RBI also led the bandwagon of central banks stepping up their gold reserves, with bullion purchases of ~34metric tonnes last year.


Under expenses, the contingency risk buffer has been set at a higher 6% vs 5.5% previously (required 5.5-6.5% range) to cover fluctuations in value of FX/ debt securities, monetary, credit and operational risks. While the surplus transfer is a positive for this year’s fiscal math, there are other pressures in the pipeline by way of higher fertiliser subsidy outlay and softer nominal GDP growth. We don’t expect an overshoot of the budgeted fiscal deficit target, but any incremental pressure might require a reprioritisation amongst the spending heads. 


Separately, Mar23 quarter (4QFY23) and full year FY23 GDP are due tonight, with growth likely to have gained momentum on year-on-year and qoq terms, as also captured by our GDP Nowcast model (see preview). A strong report card will confirm our expectations that the economy was amongst the fastest growing amongst its regional peers last year, before the pace moderates. The release is unlikely to stir onshore financial markets, with the INR 10Y yield back up to hover around 7%. The RBI’s policy review next week will be a bigger catalyst, where markets are priming for a pause in rates but a potential change in the policy stance.

Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]

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