The Monetary Policy Committee (MPC), which is slated to meet on April 3-5 to discuss the financial year’s first monetary policy, is unlikely to spring any positive surprises both on interest rates or policy stance, said 13 economists polled by FE.
The repo rate is likely to be kept unchanged at 6.5% for the seventh time in a row. And with the inflation staying above the Reserve Bank of India’s (RBI) comfort zone of 4%, the stance of withdrawn of accommodation is also likely to continue. The committee will get a lot of comfort that growth has remained strong despite its hawkish stance, giving the apex bank ample space to focus on core inflation.
Nearly 50% of the economists expect the central bank to cut rates from the third quarter of the current fiscal while 25% expect rate cuts from the second quarter. Most economists expect the central bank to retain its policy stance of withdrawal of accommodation as any change in stance could send a signal of a rate cut, sooner than later and lead to unnecessary exuberance in the market.
“RBI is not expected to be in a hurry to cut rates as growth conditions remain on the stronger side. The key risk to inflation outlook stems from food inflation which remains elevated, and hence, the committee is likely to remain cautious,” said Gaura Sen Gupta, India Economist, IDFC First Bank.
The MPC has kept the key policy repo rate unchanged after raising it by 250 basis points (bps) between May 2022 and February 2023 to tame high inflation. Since April 2022, the central bank has been focused on the withdrawal of accommodation as part of its policy stance to ensure inflation aligns with its 4% target.
The efforts by the central bank have eased prices to some extent but CPI inflation still remains above the 4% target. After touching a peak of 7.44 % in July 2023, retail inflation has eased to 5.69 % in December 2023 and 5.09% in February 2024. However, while the headline CPI inflation is sticky at 5%, growth has gained momentum. Exceeding all forecasts, the Gross Domestic Product (GDP) grew by 8.4%, marking the fastest growth rate among major economies. RBI has projected FY25 CPI inflation at 4.5% and GDP growth at 7%.
“The policy stance is unlikely to be changed before the August 2024 MPC review until there is visibility on the monsoon turnout as well as on the sustenance of the growth momentum and the US Fed’s rate decisions,” noted Aditi Nayar, Chief Economist, head – Research & Outreach, ICRA. She added that the earliest rate cut is only likely in the October 2024 meeting, unless growth posits a negative surprise in the intervening quarters.
Market participants will also be keenly watching central bank’s commentary on liquidity management. The banking system liquidity has moved from deficit to surplus in the last two months which has led to decline in overnight rates. Improvement in liquidity, due to increased government spending, has helped weighted average call rate (WACR) to move closer repo rate, earlier hovering around MSF rate (6.75%). WACR has declined from 6.81% in December 2023 to 6.47% in March 2024, according to RBI data.
“The window to cut rates opens up in Q3FY25. The incoming data, weather conditions in the advent of hotter summer months and global rate cut cycle would be key inputs in determining the policy action,” said Achala Jethmalani, Economist, RBL Bank.