While the RBI decided to keep the benchmark repo rate unchanged, in line with the expectations, interestingly, the voting decision of the MPC members changed with 4:2 voted in favour of the decision as against past few policy decisions where the vote was 5:1 in favour of the decision.
The Reserve Bank of India on Friday decided to keep its policy rate unchanged at 6.50 per cent, unchanged for the eighth time in a row. The RBI Monetary Policy Committee (MPC) met for the first time after the Lok Sabha Elections 2024. The six-member MPC, headed by RBI Governor Shaktikanta Das, decided to keep the repo rate unchanged by a 4:2 majority. It also decided to continue with its stance of ‘withdrawal of accommodation’. Shreya Sodhani, Regional Economist, Barclays, said, “The MPC kept its policy rate and stance unchanged in a 4:2 vote. The statement showed that a majority of the MPC remains hawkish on inflation, while an increase in its growth forecasts suggests no urgency to cut rates. We now think the RBI will cut rates only twice in this cycle and note the risk that easing may be delayed.”
While the central bank decided to keep the benchmark repo rate unchanged, in line with the expectations, interestingly, the voting decision of the MPC members changed with 4:2 voted in favour of the decision as against past few policy decisions where the vote was 5:1 in favour of the decision. Two of the three external MPC members voted against the decision on policy rate as well as the stance of the policy. Even with the two dissenting votes, the MPC statement was relatively balanced. The RBI Governor Shaktikanta Das also noted that inflation continued to moderate due to favourable core and fuel prices, and said that there is a need to remain “vigilant” on food prices and the “work remain to be done”. He also highlighted the rising international prices of industrial metals, which could exacerbate the domestic input cost conditions. Sonal Varma, Managing Director and Chief Economist (India and Asia ex-Japan), Nomura, said, “Two external MPC members voted for a cut versus one MPC member earlier, which suggests that the divergence within the MPC is growing further. However, we don’t think this is a signal of an impending cut, as the RBI MPC members will have to pivot to swing the needle.” She added, “The RBI continues to see the macroeconomic outlook as one of goldilocks, with higher growth and stable inflation. We largely concur with this assessment. The transition from El Nino to La Nina after June should bode well for food price inflation. With lower wage growth and inflation expectations in check, we expect headline inflation to converge with core inflation and average 4.4 per cent in FY25.” Nomura expects the first rate cut in October, with 75bp in cumulative easing in FY25.
The RBI has projected retail inflation in the first quarter of FY25 at 4.9 per cent, Q2FY25 at 3.8 per cent, Q3FY25 at 4.6 per cent, and Q4FY25 at 4.5 per cent. It has stated that assuming normal monsoon, the inflation is expected to be at 4.5 per cent in the current fiscal with risk evenly balanced. Mandar Pitale, Head- Treasury, SBM Bank India, said, “Taking into consideration the CPI trajectory which is projected as a one-off dip in Q2 to 3.8 per cent followed by resurgence in Q3 and Q4 of FY25, MPC will carefully monitor food inflation and oil prices to ascertain a descent of inflation to 4 per cent target on durable basis. This may be considered as a lead indicator to estimate the first policy rate easing likely to be preceded by the probable change of stance to “neutral” in the third quarter of this financial year (Oct-Dec); if the inflation trajectory turns out as projected by MPC.”
Economists stated that even with a gradual decline over the past year, consumer headline inflation has averaged 4.8 per cent in the last three months. They opined that an expected above-normal monsoon should help control food prices and bring the food inflation under control, which would prompt the RBI to lower interest rates towards the end of CY 2024. Shishir Baijal, Chairman and Managing Director, Knight Frank India, said, “With the economic outlook revised upwards, we anticipate the RBI will focus on controlling inflation, aiming to bring it under the 4 per cent target. Despite a gradual decline over the past year, consumer headline inflation has averaged 4.8 per cent in the last three months. While core inflation has eased, food inflation remains high, affecting household expenditure. An expected above-normal monsoon should help control food prices and bring the food inflation under control. This would prompt the RBI to perhaps lower interest rates towards the end of CY 2024 thereby further fuelling growth especially in the real estate sector, particularly benefitting the affordable housing segment.”
Aditi Nayar, Chief Economist, Head of Research and Outreach, ICRA Ltd, said, “The status quo from the MPC was on expected lines, with only the voting change on the stance to 4:2 posing a surprise. Despite this, the 10 year G-sec yield remained above 7 per cent, with the actual start to the rate cut cycle appearing distant.”
Nikhil Gupta, Chief Economist, MOFSL Group, said, “Overall, we continue to believe that rate cuts in India could happen only in late CY24 or early 2025, based on domestic and global economic growth (inflation doesn’t seem to be a significant policy variable at this stage). Also, we continue to believe that India’s real GDP growth could be ~6.5 per cent in FY25, lower than RBI’s projection.”
GDP growth projection for FY25
The RBI governor projected the FY25 GDP growth at 7.2 per cent as against 7 per cent earlier. The central bank upgraded its quarterly forecast for growth as well, with Q1, Q2, Q3 and Q4 now expected to grow at 7.3 per cent, 7.2 per cent, 7.3 per cent and 7.2 per cent, respectively. Dr Manoranjan Sharma, Chief Economist, Infomerics Ratings, said, “With India’s GDP for Q4 of FY24 growing at 7.8 per cent and for FY24 at 8.2 per cent, the economy revealed remarkable resilience despite higher-rates-for-longer, Russia-Ukraine war, Israel-Hamas/Iran war and lingering Covid concerns. The Indian government’s fiscal deficit of 5.6 per cent for FY24 was lower than the revised estimate of 5.8 per cent of GDP, due to strong revenue collection and lower subsidies. Given this overarching setting, the RBI did well to hold the rates steady and keep the stance unchanged by a majority of 4:2. The raising of the GDP growth forecast by 20 bps to 7.2 per cent augurs well for the Indian economy and was, therefore, cheered by the stock market.” Infomerics Ratings said that the rate cuts are unlikely before October 2024.
Dr Ravi Singh, SVP – Retail Research, Religare Broking Ltd, said, “The increase in the GDP projection for FY25 by RBI from 7 per cent to 7.2 per cent shows the commitment towards the balanced growth with control over inflation.”
Achala Jethmalani, Economist, RBL Bank, said, “Given India’s growth-inflation dynamics, we expect a rate-cut to possibly come through in Q4FY25 with a change in policy stance by December 2024. The progress of SW monsoon and the July budget will be critical inputs in the August policy.”
RBI’s decision not dependent on US Fed, but domestic factors
The RBI governor, during his speech, had said, “There is a view that in matters of monetary policy, the Reserve Bank is guided by the principle of ‘follow the Fed’. I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions.”
The latest US Fed’s statement, signalling three rate cuts next year, per economists, is unlikely to change the interest rate trajectory in India with the MPC focusing on domestic factors. “We maintain that the RBI will not precede the Fed in any policy reversal in CY24 and policy management will have to stay vigilant amid the fluidity of global narratives. Anchor rates like the RBI policy rate change will likely be a story from 1QCY25, assuming Fed cuts shift to next year. However, other factors like liquidity could keep RBI on tenterhooks on policy management.
…but liquidity management will be a story next few months,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services.
Meanwhile, Anshul Jain, Chief Executive India & SE Asia & APAC Tenant Representation, Cushman & Wakefield, said, “Earlier this week, with the European Central Bank and Bank of Canada beginning to cut policy rates, we can expect that other central banks could follow suit in the near future. More optimized lending rates will provide a further boost to housing transactions, and with the projected continued focus from the government towards infrastructure and affordable housing, such a move would very well spur demand in the segment as well.”
Source:financialexpress.com