As Reserve Bank of India Governor Shaktikanta Das-headed Monetary Policy Committee (MPC) begins its three-day deliberations on Wednesday, economists said that the central bank will maintain the ‘withdrawal of accommodation’ stance and will keep the repo rate unchanged at 6.50 per cent. RBI Governor Shaktikanta Das will disclose its decision on the morning of December 8. The RBI MPC consists of six members – both external and RBI officials. Alongside Governor Shaktikanta Das, RBI officials are Rajiv Ranjan, serving as Executive Director, and Michael Debabrata Patra, as the Deputy Governor. While Shashanka Bhide, Ashima Goyal, and Jayanth R Varma are the external members.
According to economists, RBI is likely to keep repo rates unchanged keeping in mind the fact that retail inflation is still above its 4 per cent target despite moderation while the economic growth remains strong. Moreover, crude oil prices have been volatile and geopolitical risks loom. Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, said, “In its 8 December meeting, we expect the MPC to remain on a cautious hold and keep the repo rate unchanged at 6.50 per cent. The central bank may flag risks to inflation from a potential recurrence of food price shocks and its impact on inflation expectations, even as it draws comfort from the moderation in core inflation.”
“In terms of outlook, we think the RBI may raise its annual growth forecast modestly, but is likely to keep its inflation forecasts unchanged, citing uncertainty around the near term outlook due to possible changes in domestic food and international energy prices,” he added.
Economists further welcomed the buoyant GDP numbers and said that the growth numbers will give comfort to the MPC and a continued pause becomes a certainty in this meeting. “Given the better-than-expected economic growth in Q2FY24, we expect the RBI to revise up its growth projections from 6.5 per cent by 20-30 bps,” said Rajani Sinha, Chief Economist, CareEdge.
While RBI is likely to continue to sound hawkish to signal its caution, economists and experts opined that the central bank will not opt for rate cuts till the next fiscal year.
Here are the views of major economists on the RBI MPC decision slated for December 8:
Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research
There is a strong likelihood that RBI-MPC will keep the benchmark repo rate unaltered at 6.50 per cent in the upcoming meeting and thereby continue with the pause mode for the fifth consecutive policy review. It’s also unlikely that there will be any revision in the monetary policy stance of “withdrawal of accommodation”. We will look forward to RBI’s assessment of growth and inflation in its statement. GDP growth in the second quarter of the year has been significantly higher than market and RBI’s forecasts at 7.6 per cent YoY, translating to a robust growth of 7.7 per cent YoY in H1FY24. Given the stronger growth momentum, there is a possibility that RBI revises its GDP forecast for the current year by 25-30 bps from the existing figure of 6.50 per cent. Acuité Research has already revised its growth forecast from 6.0 per cent to 6.5 per cent after the GDP data of the second quarter; nonetheless, we expect a moderation in growth in the second half of the year given the impact of El Nino on rainfall in the current year and its consequent effect on agricultural output and rural demand.
Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays
In its 8 December meeting, we expect the MPC to remain on a cautious hold and keep the repo rate unchanged at 6.5 per cent. The central bank may flag risks to inflation from a potential recurrence of food price shocks and its impact on inflation expectations, even as it draws comfort from the moderation in core inflation.
Domestic growth still seems to be holding up, and with the Q3 23 GDP growth print springing a positive surprise, we think the RBI will have little concern over the growth momentum. The MPC is likely to flag a moderation in the pace of monetary transmission, as spreads of lending rates over the repo rate have narrowed in the past few months. Accordingly, we expect the committee to maintain the monetary policy stance pointed towards a “withdrawal of accommodation” despite deficit liquidity conditions.
We think the RBI may raise its growth forecast for FY23-24, though only modestly to incorporate the higher-than-expected Q3FY23 GDP growth (the RBI’s Q3 forecast was 6.5 per cent, vs actual 7.6 per cent), and continuing momentum in the current quarter.
Rumki Majumdar, Economist, Deloitte India
We expect a sustained status quo in policy stance. The economy is picking momentum so there will be demand pressure on inflation. Besides, the US Federal reserve is also likely to keep its policy stance hawkish. Furthermore, the recent impact of winter rain on the Rabi crop, coupled with lower crop production in the last quarter, is anticipated to constrain the supply side, thereby exerting upward pressure on food prices, keeping them elevated. All these factors contribute to the vigilant approach that RBI may take up.
Prasenjit Basu, Chief Economist, ICICI Securities
With CPI inflation moderating to 4.87 per cent YoY in Oct’23 (and core CPI inflation to 4.5 per cent YoY), we expect the RBI to keep the policy repo rate unchanged at its next MPC meeting. The prospect of further easing in inflationary pressure is likely to result in the MPC moving to a neutral policy stance (from the previous stance of “withdrawal of accommodation”).
Deepak Jasani, Head of Retail Research, HDFC Securities
The RBI MPC is likely to hold rates at its forthcoming meeting. However, its commentary on the way forward will be keenly watched and analyzed. Given the buoyant GDP numbers and sticky inflation (including food), it may signal heightened vigilance on demand trends in the economy and on CPI and its components. It could sound hawkish as far as the transmission of rates and keeping liquidity tight is concerned. The rate cuts may have to wait till at least next fiscal year.
Rajani Sinha, Chief Economist, CareEdge
Despite challenges in certain pockets like rural demand and agricultural output, the overall economic outlook has improved significantly since that last policy meeting in October. Given the better-than-expected economic growth in Q2FY24, we expect the RBI to revise up its growth projections from 6.5 per cent by 20-30 bps. Furthermore, the headline inflation has eased significantly, and core inflation remains relatively stable close to 4 per cent. However, food price volatility remains a cause of concern and can potentially keep headline inflation elevated in the coming months. Liquidity conditions have tightened, and borrowing costs remain elevated. Given the current circumstances, the RBI will likely continue supporting economic growth, while remaining cautious on inflation. Thus, we anticipate that the RBI will keep its policy rates unchanged, while adhering to its stance of “withdrawal of accommodation”. We do not anticipate any further rate hikes by the RBI in this fiscal year. The MPC is expected to consider rate cuts after the first quarter of the upcoming fiscal year.
Ranen Banerjee, Partner, Economic Advisory Services, PwC India
The two major factors that have changed since the last MPC meeting are inflation and growth prints. The inflation has moderated and especially the core inflation but it is still above the 4 per cent targeted inflation rate though well within the plus minus 2 per cent range. The surprising element has been the Q2 GDP print that has surprised everyone. The growth numbers will give comfort to the MPC and a continued pause becomes a certainty in this meeting. The “withdrawal of accommodation” stance could have a difference of opinion within the committee but it is likely to be retained.
Dr Manoranjan Sharma, Chief Economist, Infomerics Ratings
The MPC is likely to go in for an unchanged benchmark policy rate on December 8. This policy would be announced against the backdrop of a mixed macro economic and global canvas. Positive cues included unchanged Fed Reserve policy in the range of 5.25 per cent to 5.50 per cent for the second time on November 2, average crude price at below $85 per barrel for 8 months upto November, CPI inflation dropping from 5.02 per cent in Sept 2023 to 4.87 per cent in October, comfortable foreign exchange reserves of $600 billions and current account deficit (CAD) at 1.1 per cent of GDP in April-June 2023. There has been a robust GDP growth of 7.6 per cent on top of 7.8 per cent in Q1. This growth was spearheaded by manufacturing sector growth of 13.9 per cent over last year. Fiscal deficit has been restricted at 45 per cent of the targeted estimates of April/Sept 2023 on surging direct and indirect taxes. Tailwinds also include corporate profitability and investments.
To place matters in perspective, we must, however, also consider the base effect in the growth process, non realisation of the full potential of private investment, spike in personal loans, higher logistics cost vis-a-vis other countries, moderation in the services sector and heightened geopolitical tensions post the Russia-Ukraine war and more recently the Israeli-Hamas war. Hence, taking an overall view of the global and domestic environment, we don’t see a change in the forthcoming RBI’s Policy in terms of key benchmark rates. We also see the stance of the policy to be retained as the “withdrawal of accommodation”.
Mandar Pitale, Head- Treasury, SBM Bank India
Overall data prints released after October MPC are supportive for MPC to continue with its current “withdrawal of accommodation” stance. MPC is also likely to maintain the status quo on rates in the forthcoming policy announcement.
The present liquidity dynamic prevailing in the market is governed by shallowness in the systemic liquidity with the overnight rates hovering near the upper band of the policy rate corridor (MSF) supporting effective transmission of the past rate actions. The average monthly liquidity absorption for the last 2 months is well below Rs 1 lakh crore. Since the present liquidity equation is expected to continue for the foreseeable future, RBI may not be required to resort to structural liquidity suction tools such as OMO sale in coming months.
Forward guidance on inflation, comments on behaviour of systemic liquidity going ahead as well as any explanation on not using the structural liquidity tools such as OMO Sales as touched upon in the previous MPC will be keenly watched by the market participants.
Vikrant Mehta, Head – Fixed Income, ITI AMC
The RBI MPC meeting later this week is expected to be a non-event from the policy rate perspective as the Central Bank is predicted to keep the repo rate unchanged for the fifth meeting in a row. While we do not expect the RBI to indicate a “dovish hold” in this meeting, we do expect the Central Bank to tone down its hawkishness as the global environment is less hostile as compared to the previous policy review in October 2023. Additionally, markets will eagerly watch for cues on liquidity management and RBI open market operations.