With the Reserve Bank of India’s (RBI) monetary policy meeting underway and Governor Shaktikanta Das all set to announce the decision on benchmark interest rate on October 9, economists said that the Monetary Policy Committee (MPC) is expected to keep the repo rate unchanged at 6.50 per cent. Dhiraj Relli, MD & CEO, HDFC Securities, said, “While we do not expect the RBI to start its rate cut cycle, the possibility of a change in stance to neutral is on the table. The MPC may keep the repo rates steady at 6.50 per cent for the 10th consecutive time. Although it remains a close call, the RBI could very well deliver a no change policy while only changing its tone towards the dovish side.”
The MPC is expected to take into account several crucial factors, including ongoing inflationary pressures, global economic uncertainties, and domestic growth trends. Indranil Pan, Chief Economist, YES Bank, said, “This policy is likely to be interesting, especially as new external members take positions. Data in the form of a PMI dip, fall in 2-W and PV growth, dip in personal loans, etc. point to a slowdown story for India. This has led to some noises, backed by the start of a Fed rate cycle, for at least a change in the stance by the RBI, if not a rate cut. We think that while growth is slowing, it is not crashing.”
On the other hand, the RBI had been communicating its commitment towards bringing inflation durably to the 4 per cent mark. Indranil Pan added that while there has been progress towards that direction with good rains and healthy reservoir levels suggesting comfort on food inflation in months ahead, the RBI will have to be guarded of global risks to inflation emanating from a sudden jump in the commodity prices, a China recovery, etc. “With growth not showing signs of crashing but with some lingering risks on the price side, we see the best bet for RBI to continue to stay on the sidelines. Every policy becomes live from here on, and incoming data will determine RBI’s reaction function. Even as uncertainty exists on the timing of the start of the rate cut, for sure this cycle will be shallow to the extent of only a 50-75 bps easing,” he added.
Emkay Global Financial Services, said, “The fluidity of global narratives in conjunction with comfortable banking liquidity, easy financial conditions on net, incipient weakness in growth, noisy food inflation, and the still-elusive 4 per cent inflation target, etc, would make it tricky for the RBI to find a balance in its policy biases. While the upcoming policy may not see any rate action, a stance change to neutral with stress on being ‘actively disinflationary’ would be MPC’s best bet to prep ground for the start of a shallow easing cycle, possibly from December.”
Meanwhile, Sanjeev Agrawal, President, PHDCCI, maintained, “India’s inflation trajectory is coming significantly down below the RBI target band, at this juncture, the repo rate cut will have a strong positive impact on India’s consumption demand and overall economic growth. The higher level of kharif sowing indicates robust harvest touching the mandis in the coming days and improving the supplies further. Improved supply chains will support the inflation trajectory to remain in the benign conditions. As inflation is softening in many economies, cut in policy rates becomes inevitable to support growth and to boost production possibility frontiers.”
Effect from geopolitical tensions
The RBI is wary of global risks, such as rising geopolitical tensions in West Asia which could lead to rise in oil prices and exert pressure on domestic inflation. An analysis report by JM Financial said, “The MPC meeting will be in the backdrop of ongoing geopolitical tensions between Iran and Israel, further escalation of which would be inflationary in nature. This reflects in RBI’s inflation expectations which remains elevated at 4.5 per cent for FY25 vs. target of 4 per cent. While on the growth front, RBI seems optimistic with a 7.2 per cent GDP growth estimate for FY25, this is despite some signs of easing across high frequency indicators. India’s Manufacturing (56.5) and Services PMI (57.7) moderated slightly in recent months. Moreover, further deterioration in the trade activity would drag GDP growth as well as exert pressure on the external account.”
Suresh Darak, Founder and Director, Bondbazaar, said, “We expect the MPC to keep rates unchanged despite US and other major economies undertaking them, given the geopolitical turmoil that has led to uncertainty, lower deposit growth as compared credit growth and crude oil prices rising.”
Effect from US Fed decision
Besides geopolitical tensions, there have been major global events like the US Federal Reserve slashing the interest rates by 50 basis points. Other major economies like the Euro Zone, UK and China have also undertaken rate cuts in the last couple of months in response to cooling inflation. However, Governor Shaktikanta Das has repeatedly clarified that RBI actions are based on domestic factors.
Gaura Sen Gupta, Chief Economist, IDFC First Bank, said, “For RBI policy, domestic factors remain key. The timing of the start of the rate cut cycle will depend on how food inflation pressures evolve. We continue to expect a shallow rate cut cycle of 50 bps by March 2025, as growth conditions hold-up. RBI is expected to maintain the status quo in October policy and cut policy rates in December 2024. We expect food inflation pressures to ease in the coming months with monsoon distribution remaining positive.”
Barclays maintained that MPC is expected to remain unflinching at the October meeting, mentioning the Fed cut but not over emphasising it in policy deliberations. “The MPC’s only focus will be the domestic economy, in our view, with communication emphasising inflation and its outlook, peppered with comments about the resilience of growth. The tone is likely to remain the same as before, with the governor stressing the need to “maintain[ing] a close vigil on the inflation trajectory” and to keep policy disinflationary. The RBI governor recently stated “… the growth momentum continues to be good, India’s growth story is intact and, so far as inflation outlook is concerned, we have to look at the month-on-month momentum”,” said Shreya Sodhani, Regional Economist, Barclays.
What will be the stance of new MPC members?
Earlier this month, the Centre had appointed three new members to the RBI’s monetary policy panel. The new members are Saugata Bhattacharya, Economist; Dr Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development; and Professor Ram Singh, Director, Delhi School of Economics, University of Delhi. The three new MPC members will replace two outgoing members who voted for cuts in recent meetings.
While it is too early to draw any firm conclusions on the policy stances of the new MPC members, especially Ram Singh and Nagesh Kumar, who have not commented much on monetary policy directly, Sonal Varma, MD and Chief Economist for India and Asia excluding Japan at Nomura, said that the new members are more balanced and neutral, rather than hawkish. “Saugata Bhattacharya made an emphatic case for rate cuts back in August, although it remains to be seen how his views have evolved since,” she added.
Shreya Sodhani from Barclays, said, “At its meeting on 7-9 October, we expect the RBI’s monetary policy committee to maintain the policy rate at 6.5 per cent and the stance as a “withdrawal of accommodation”. Our base case is for at least one dissenting vote, though we acknowledge the risks around this view with new external members joining the MPC.” She further added that by the December meeting, the MPC is expected to have received enough data to suggest that m/m inflation pressures have eased and inflation is in comfortable territory, and for some moderation in activity to be more visible. “Combined, this will likely open the door for a December rate cut by the MPC, with risks tilted towards a later than earlier cut, in our view,” she said.