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Business News/ Economy / RBI MPC 2024: Can the Indian central bank precede US Fed in cutting rates? Experts take on repo rate, policy stance

RBI MPC 2024: Can the Indian central bank precede US Fed in cutting rates? Experts take on repo rate, policy stance

RBI's Monetary Policy Committee (MPC) meeting is expected to keep the key policy rate unchanged for the sixth consecutive time

RBI MPC 2024: The three-day meeting of the RBI MPC started on Tuesday and its outcome is due on Thursday (February 8).Premium
RBI MPC 2024: The three-day meeting of the RBI MPC started on Tuesday and its outcome is due on Thursday (February 8).

There is not much excitement in the markets for the Reserve Bank of India’s (RBI)Monetary Policy Committee (MPC) meeting. Headed by RBI Governor Shaktikanta Das, the central bank MPC began its three-day deliberations in Mumbai on 6 February. This is the first MPC of 2024, and also the first meeting after the presentation of Interim Budget 2024.

Experts believe that RBI will keep its key policy rate – unchanged for the sixth consecutive time at 6.5 per cent.

The three-day meeting of the RBI MPC started on Tuesday and its outcome is due on Thursday (February 8).

Will there be any change in repo rate this time?

According to Madan Sabnavis, Chief Economist, the Bank of Baroda, there is a very high likelihood that the repo rate will remain unchanged again.

When will the RBI pivot on rates?

“We have long maintained that the RBI's policy has been somewhat pegged to the Fed, specifically in the last two years, even as it formally targeted inflation. The RBI's swift turn of tone and action pivots in the last two years have been influenced purely by global causes [recall a few key hawkish pivots: Ex. 1]. Amid fluid external dynamics, the policy prerogative has essentially been to ensure financial stability, even as the policy narrative has been domestic - implying the aim of financial stability may have even preceded inflation management in the last two years," said -Madhavi Arora, Lead – Economist, Emkay Global Financial Services Ltd.

Can RBI Precede the Fed?

“We understand that shifting debates on global narratives requires the RBI to be flexible as well. Presently, a swift change in risk appetite and low volatility in risk assets has given a comfortable breathing space to EMs, including India, on offering higher risk premia. As of now, markets are assigning ~60% probability of the first Fed cut by May 24 (CY-24, 117bps cut) [Ex. 2]; and domestically, policy normalization is seen by Feb-24, with one cut each in Jun-24 and Oct-24. We think factors such as: 1) US inflation trends taking time to discern, 2) economic resilience, and 3) easier financial conditions feeding back into demand may be slowing any early move towards massive key DM central bank easing this year. This should restrain the RBI from cutting early as well. As of now, we see the Fed not cutting before Jun-24, with the RBI following suit with a lag. We maintain that the RBI will not precede the Fed in any policy reversal in CY24," said Madhavi Arora.

Should there be a formal change in the stance?

The stance of ‘withdrawal of accommodation’ appears to be very likely this time too, believes Madan Sabnavis.

But the market is looking for signals to justify a change to ‘neutral’. This stems from the Union Budget or Interim Budget talking of a lower gross borrowing programme for FY25, added Madan.

“The stance has been loosely linked to liquidity behavior, with the RBI changing it to 'withdrawal of accommodation' in Apr-22 and adding SDF to its liquidity management toolkit. While system liquidity stayed largely manageable in 2023, the interbank call rate stayed above the repo rate since Aug-23," said Arora.

Given that the call money rate has been hugging MSF for the last four months, technically the accommodative stance is already under the scanner.  A stance change, thus, may wait until April and will give the RBI some elbow room to understand and adjust to global dynamics, she added.

“We believe the RBI may keep a status quo on key policy rates, however, the focus on fiscal consolidation in the recent Interim budget by the honourable Finance Minister, may give some headroom to the RBI to change stance to ‘Neutral’ from the current stance of ‘withdrawal of accommodation’," said George Alexander Muthoot, MD, Muthoot Finance.

On inflation forecast

“We do not expect any change in the inflation forecasts going forward as nothing has changed since the last policy," said BoB Chief Economist.

Possibility of rate cut

Going by the RBI forecasts on inflation for the next year, it can be seen that the number will remain above 5% for Q1 of FY25 and come down to 4% in Q2 only. After this period, it would increase to 4.7% in Q3. 

Hence there is reason to believe that a rate cut can be considered only in Q2-FY25 after positive indicators on the inflation and monsoon fronts, added Madan Sabnavis.

Repo cut unlikely; a probable change in liquidity stance. RBI was clear that repo cuts were out of the picture unless headline inflation came down and sustainably remained at the 4% target. Hence, given the current CPI level, the possibility of a rate cut has been ruled out, said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.

On GDP forecast

The RBI may review the GDP forecast for FY24 in light of the NSO forecasting 7.3% growth. We do believe it will be lower at 6-6-6.7% and rise marginally to 6.75-6.8% next year. The RBI may however use the NSO growth rate which has also been used in the budget formulation process and provide a projection for next year. That would be something to watch out for.

As per the first advanced estimate of MOSPI, the economy is likely to grow at 7.3% driven by strong investment growth (projected to grow by 10.3%). Industrial growth to expand by 7.9% in FY24 against 4.4% in the previous year. GST collection, E-way bills, and PMI data show signs of healthy growth. Nevertheless, the consumption demand is tepid with a growth rate of 4.4% in FY24 against 7.5% in FY23. The significantly slower growth of consumption demand, which contributes 50% of GDP, raises concern. The agriculture sector is also facing headwinds because of below-average rainfall. Overall the real GDP numbers stay robust. Against the backdrop of improved economic outlook RBI is likely to increase the growth projection for FY24 to 7.3%, said Ajit Kabi, Research Analyst at LKP Securities

On liquidity front

Liquidity deficit, is a concern. Interbank liquidity has worsened since the Dec’23 MPC meet, causing concerns around pressurizing call rates hovering around the MSF as the government has withheld spending (visible from its huge cash balances) along with more currency in circulation, record tax collections and faster credit offtake than deposit accretion. “One on hand while this accelerates the transmission of rate hikes, the mandate for RBI is to keep its operating target (the weighted average call rates) near the repo rate, not MSF," said Sujan Hajra

On the other hand, we reckon the RBI would take a more proactive approach on the liquidity front given the deeply negative liquidity in the interbank market, added Sujan

Gold-linked credit line enabled via UPI

While banks offer credit lines to companies like an overdraft, on similar lines, banks don’t have a small credit line product for a common man which can help address monthly short-term finance needs and as a result, the common man either keeps a huge balance in a savings account, or resorts to a credit card or a personal loan to meet immediate gaps in monthly finance needs.

“We believe that a ‘gold linked credit line via UPI’ will be ideal for the common man. For this extending the UPI linkage (payment system) by NBFCs is the first requirement, and once this is allowed, gold loan NBFCs can extend a credit line to the common man. Unlike a credit card, this product will work like a secured credit extended by NBFCs and also attract a lower interest rate (of 12%-18%) as compared to a higher interest rate (of ~36%) on a credit card," said George Alexander Muthoot.

Headline Inflation a concern; core inflation stable

Turning to inflation, the headline inflation was on the higher side of 5.7% in December; driven by higher food prices (especially, pulses, legumes, and spices). However, core inflation is stable at below 4%, said Ajit Kabi.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Sangeeta Ojha
A business media enthusiast. Writes on personal finance, business and banking.
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Published: 07 Feb 2024, 01:50 PM IST
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