By Anubhuti Sahay
A 25-bps hike in the repo rate, taking it to 6.5%, and a likely indication of a future pause at the upcoming Monetary Policy Committee (MPC) to be held over February 6-8 is the consensus view. A section of the market also expects the statement to be dovish.
These expectations are driven by the recent slowdown in inflation; the last two CPI prints have been below 6% (the upper threshold of the mandated CPI band) after a gap of 10 months. Additionally, global central banks have turned more data-dependent after a series of aggressive rate hikes in 2022. Based on their commentary, policy rates appear to be near a peak. Thus, a similar turn in the MPC’s narrative is widely expected.
Standard Chartered agrees with the consensus view that the MPC is likely to signal a pause after hiking by 25bps in February. The indication on a prolonged pause is likely to come after a 250 bps increase (including a potential 25bps rate increase on February 8) in the repo rate since May 2022.
The decision on rates, as well as the stance, is likely to be divided, with a few members of the MPC voting in favour of a pause and switch in stance. The minutes of the meeting, which will be released in two weeks, will offer more insight on each member’s view on the inflation trajectory.
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However, Standard Chartered does not expect the statement to be dovish.
Even as the MPC indicates a future pause, its likely to retain the optionality to hike later (if needed) by maintaining the stance at ‘withdrawal of accommodation’ rather than switching to ‘neutral’. Retaining such an option would give the MPC the much-needed space to assess the durability of the moderation in inflation in FY24. The headline and core CPI inflation can be expected to moderate to 5% and 5.5%, respectively, in FY24 from 6.7% and 6% in FY23. These forecasts (market consensus is similar to Standard Chartered’s CPI projections) bode well for a switch to a dovish stance.
However, given the recent history of unexpected upside surprises to inflation, it would be prudent stay cautious on forecasted inflation trajectory in FY24. For instance, the impact on global commodity demand and prices once China reopens fully and global growth is back to the trend is likely to show with a lag.
Additionally, after two subsequent headline CPI prints below 6%, January CPI inflation is expected to move closer to or higher than 6% as disinflationary pressure from food prices (especially perishables) ebb. With CPI inflation still hovering around 6%, the space for the MPC to turn dovish seems limited.
A recent speech delivered by the Reserve Bank of India (RBI) Governor, Shaktikanta Das, also indicates that the MPC is unlikely to strengthen market expectations on rate cuts, as of now. To quote Governor Das, “central banks have started … pivot towards lower rate hikes or pauses. At the same time, they continue to emphatically reiterate their resolve to bring inflation down closer to targets. High policy rates for a longer duration appear to be a distinct possibility, going forward.” Thus, a clear message of continued vigilance on inflation risks amid global uncertainty is most likely from the MPC. While a pause is likely, we may also see pushback on expectations of rate cuts.
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Besides the rate action and stance, markets will keenly watch for any guidance on the Indian rupee (INR) liquidity. While INR liquidity is still in surplus, based on our forecast of another year of a balance of payments (BoP) deficit in FY24 (we forecast a $5.5billion FY24 BoP deficit) and the usual currency leakage, it is likely to slip into a deficit.
This can be offset and system liquidity can still be kept in surplus if RBI takes liquidity-enhancing measures such as open-market operations (OMOs). However, any such measures would depend on whether the central bank would like to see INR liquidity in surplus or deficit.
RBI has so far assured of adequate liquidity to support growth. RBI is likely to stay supportive of growth even in FY24. However, with INR liquidity headed towards a deficit from a significant surplus last year, refreshed guidance on liquidity would help to steer the market in the right direction.
This is of significance following the recent Union budget presentation. India’s bond market has gained as the fiscal deficit target was in line with expectations and gross borrowing was announced at the lower end of market expectations.
The markets will await further clarity on INR liquidity to assess the yield direction in FY24; liquidity surplus is usually supportive of lower bond yields.
The writer is Head (South Asia), economics research, Standard Chartered Bank