MPC is expected to hold policy rates for a foreseeable future going ahead with a likelihood of starting rate easing cycle in the last quarter of current calendar year.
With the Reserve Bank of India’s Monetary Policy Committee all set to announce its decision on interest rates on June 7, economists and experts said that the central bank is likely to maintain the status quo on repo rate at 6.50 per cent. Mandar Pitale, Head- Treasury, SBM Bank India, said, “At the backdrop of the fragile outlook for the global economy amidst stalling in the descent of inflation and thus reigniting risks to global financial stability, MPC is expected to hold policy rates for a foreseeable future going ahead with a likelihood of starting rate easing cycle in the last quarter of current calendar year. Favourable monsoon impact on the food inflation trajectory will have a major influence on the commencement of the easing cycle.”
The MPC meeting led by Shaktikanta Das will provide a foreword of the course that the RBI will adopt for the current fiscal year while trying to strike a balance between sustaining growth and inflation under the 4 per cent target. According to a poll of 13 economists by FE, the six member committee is likely to maintain status quo on repo rate at 6.50 per cent and “withdrawal of accommodation” stance in the ongoing meeting that ends on June 7. Per the survey, around 30 per cent economists believe the RBI will likely start cutting repo rate in the October-December quarter or in the first half of calendar year 2025.
Shreya Sodhani, Regional Economist, Barclays, said, “With the still-robust growth outlook creating no urgency to cut rates and inflation still above target, driven mainly by food, we expect the MPC to vote 5-1 to keep the policy settings unchanged. We do not expect the majority of the MPC to see a reason to cut before December. We continue to expect the window for a rate cut to open only in December 2024, with the central bank noting solid growth, which allows it to focus solely on inflation. While we expect four 25bp cuts by the RBI, we see risks of a shallower cycle if the growth outlook remains robust.”
Aditi Nayar, Chief Economist, Head of Research and Outreach, ICRA Ltd, said, “The recent inflation data and the outlook for prices of food and commodities had suggested a status quo on the rates and stance in the June 2024 monetary policy review. This has been further cemented by the higher-than-forecast expansion in the Indian economy in Q4 FY2024, which led to the full year GDP growth printing above 8 per cent. As a result, the likelihood of a stance change in August 2024 followed by a rate cut in October 2024 has eased, unless an abundantly well distributed monsoon quells food prices in a sustainable fashion.”
Earlier last week, India reported GDP growth at 7.8 per cent in the March quarter of the previous financial year, pushing up the annual growth rate for the whole of FY24 to 8.2 per cent. “The resilience of GDP growth backed by sustained momentum in domestic demand conditions, is providing the space to defer the start of the easing cycle staying focused on inflation,” said Mandar Pitale from SBM Bank India.
Food inflation remains a concern
Furthermore, even as the core inflation has been largely benign, higher food inflation has kept the overall headline inflation higher. Retail inflation fell to an 11-month low of 4.83 per cent year-on-year in April, from 4.85 per cent in March, mainly due to a higher deflation in fuel and light and lower core inflation. On a sequential basis, the CPI index rose 0.5 per cent in April, the highest rate in six months. The increase in sequential price pressures was led by higher food prices. Besides elevated food inflation, the incremental risk to inflation stems from the recent uptick in global commodity prices, especially industrial metals. Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research, said, “The current stability in headline retail inflation is surely a comfort factor although the stickiness in food inflation amidst a severe summer continues to be a matter of concern to the policymakers. Hopefully, food prices will see a progressive moderation with the play out of monsoon. While we expect the inflation print to average around 4.5 per cent in the base case, there are risks that it may face resistance in dropping to lower levels. The implication of sticky inflation and economic resilience imply a prolonged wait for rate cuts. Clearly, there is significant uncertainty today whether any rate cuts will be announced by the RBI in calendar 2024. In the case of the US, the number of projected rate cuts in 2024 has already dropped from 4-5 to 1-2 and that too back ended.”
RBI’s dependence on US Fed decision
Per recent data, US inflation stabilised in April as the personal consumption expenditures (PCE) price index increased 0.3 per cent last month. Softer US inflation data raised bets of an interest rate cut by the US Fed in September. The decision by the US Fed to start cutting the interest rates will also impact the RBI’s take on the rate cut and change in stance. Paritosh Kashyap, President & Head-Wholesale Bank, Kotak Mahindra Bank, said, “The RBI is expected to hold the key policy rates in its June monetary policy review amidst volatile food inflation and a further pushback to the timing of the US Fed’s rate easing cycle. Seen in the background of domestic and global inflationary projections, the expectations of a rate cut now moves to Q3FY25 at best. The hawkishness in stance is expected to continue for time being as the RBI would await far more clarity from the US Federal Reserve and other central banks. US CPI print in April came in line with expectations at 3.4 per cent, adding to relief for US FOMC. Market continues to expect a 25-50 bps rate cut from the FOMC by the end of this calendar year.”
Vikrant Mehta, Head – Fixed Income, ITI Mutual Fund, said, “Since the MPC last meeting, geopolitical volatility rose in the first half of April, and though it appears to have subsided post that, underlying tensions continue to simmer. Furthermore, global markets now anticipate the Fed to be on a “longer than anticipated hold” as compared to March. Thus, in the current environment, though India’s headline inflation is expected to moderate further, we feel that the RBI is unlikely to make changes to both – policy rate as well as the stance of the policy.”
A bumper dividend to govt may alleviate concerns about growth outlook
Amit Goel, Co-Founder & Chief Global Strategist, Pace 360, said, “The Reserve Bank of India is set to keep its repo rate at 6.5 per cent at its June 7 review. Policy is turning more restrictive as cooling inflation pushes up real rates, hurting growth. The RBI’s surprise record dividend payment to the government may alleviate concerns about the growth outlook. Policymakers are likely to put the money to work in new spending in the budget revision due by July. Against this backdrop, we expect the RBI to stay on hold until after the Fed cuts rates. If the Fed waits until September, the RBI will likely wait until October to move. Lower inflation will also open the window for the RBI to ease ahead.”
The RBI had, last month, announced that it has approved a dividend payout of Rs 2.11 lakh crore to the central government for 2023-24. This is more than double the amount it had paid for the previous financial year 2022-23.
Mahendra Kumar Jajoo, CIO- Fixed Income, Mirae Asset Investment Managers, said, “RBI is expected to keep key policy rates unchanged at the forthcoming MPC meeting announcement on June 7. However, the guidance is expected to turn slightly more dovish compared to the previous meeting. RBI has declared a record dividend this year, more than double of that projected in the budget. Oil prices have remained range bound notwithstanding the recent escalation in geopolitical in the Middle East, tax collections remained robust with GST exceeding the Rs 2 lakh crore mark for the first time in April 2024. Further, there has been slight easing in financial conditions at the global stage after the Fed literally ruled out any further hikes but guided for more patience with rate cuts.”
The RBI MPC kick started its three-day meeting on Wednesday (June 5), in the immediate backdrop of Lok Sabha election results, and the decision on interest rates will be announced by RBI Governor Shaktikanta Das on June 7.
Source:financialexpress.com