With the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting beginning its three-day deliberations on key interest rate today (August 4), Nuvama said that the Sanjay Malhotra-led team is expected to maintain the status quo for now. The decision of the meeting will be announced on Wednesday (August 6).
“After front-loading a 50bp-rate cut and shifting to a ‘neutral’ stance at the last policy, we see MPC holding rates steady at 5.5 per cent,” Nuvama said, noting that RBI Governor Sanjay Malhotra had earlier hinted at limited room for further easing. However, the brokerage firm believed the case for additional rate cuts is “compelling”.
Muted growth, soft inflation set stage for future rate cuts
India’s economy is losing momentum with key indicators such as credit growth, passenger vehicle and real estate sales, corporate profits, exports, and private capex showing signs of moderation.
Corporates are grappling with sluggish revenue and profit growth, dampening their appetite for fresh capital expenditure. At the same time, households are facing muted income growth and a slowdown in credit availability, which is weighing on both their spending power and willingness to consume. Meanwhile, government spending is likely to remain in a slow lane and tax revenues too have slipped below 10 per cent YoY. On the external front, the export outlook remains uncertain amid ongoing global trade tensions.
Inflation, meanwhile, is comfortably within the RBI’s target range. Headline CPI is running near 6Y low and even the core CPI (ex-commodities) has been hovering below 4 per cent for a long time now.
With fiscal policy increasingly constrained by consolidation goals, Nuvama said, the onus now falls on the RBI to do the heavy lifting. While the brokerage firm pencilled in a status quo by the MPC, it did expect more rate cuts down the line to reignite demand.
Outlook: Pause for now, more cuts down the line
Earlier in June, RBI Governor Sanjay Malhotra had announced a 50 bps cut in repo rate while changing the stance to ‘Neutral’. Accordingly, Nuvama expects the MPC to hold rates steady at the upcoming policy review.
“Systemic liquidity is ample and may remain so, and monetary transmission is progressing well. That said, there is an outside chance of the RBI shifting its stance back to ‘accommodative’ from ‘neutral’ earlier given inflation is undershooting,” it said.
In sum, the evolving domestic growth-inflation dynamics, along with a fragile global outlook, strengthen the case for more rate cuts in the months ahead—even if the RBI chooses to wait and watch for now.