RBI MPC meeting begins today: Rate pause may continue on GDP growth, inflation; Key indicators to watch
- According to majority of economists on D-Street, the RBI would keep its key repo rate unchanged at 6.50 per cent at the conclusion of the April 3-5 MPC meeting.
Reserve Bank of India (RBI) Governor Shaktikanta Das will unveil the first monetary policy of the financial year 2024-25 on Friday, April 5, after a two-day review meeting, shortly after the conclusion of fiscal 2023-24 (FY24) amid strong macroeconomic indicators. The RBI's rate-setting panel will observe the impact of global headwinds on economic determinants such as the growth in gross domestic product (GDP) and the inflation trajectory.
The review by the six-member Monetary Policy Committee (MPC) led by Das will provide a foreword of the course that the central bank will adopt in the remainder of the new financial year as it seeks to strike a fine balance between sustaining growth and sustaining inflation under the four per cent target.
Economists expect RBI to hold rates steady
According to a majority of analysts and economists on D-Street, the RBI would keep its key repo rate unchanged at 6.50 per cent at the conclusion of the April 3-5 MPC meeting, continuing its stance of ‘withdrawal of accommodation’. However, the recent uptick in crude oil prices over geopolitical conflicts is likely to keep the MPC's focus on inflation and managing the impact of global headwinds, despite record-high economic growth in the previous quarter.
"The MPC is unlikely to act on policy rates on April 5th. Even though rate cuts can be expected this year, the time is not yet conducive for a rate cut. The growth momentum in the economy is strong and FY 24 is likely to register GDP growth of 7.6 per cent, much ahead of the initial estimates,'' said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Also Read: RBI likely to keep interest rates unchanged in upcoming April, June policy meetings: Report
‘’It is possible for India to achieve a growth rate of seven per cent in FY25. So, a rate cut is not warranted now. The April 5th policy announcement is unlikely to impact the market, given the current market mood and resilience. The market is presently influenced by retail investor enthusiasm, the sustained flows into the market via mutual funds and fundamental support from good GDP growth and decent corporate earnings,'' added Dr. V K Vijayakumar.
Most analysts argued on the timing of rate cuts by the RBI in 2024. Economists at State Bank of India (SBI) Research said that the RBI will maintain the policy stance as 'withdrawal of accommodation' and the first rate cut will occur in the third quarter of current fiscal (Q3FY25), and the rate-cut cycle could be shallow.
‘’After a 25 bps hike in February 2023, the rate has remained unchanged at this level over seven straight MPC meetings. With the rise in crude oil prices and the USD INR recently touching its all-time high, it is unlikely that the RBI will change its stance to neutral. We expect the RBI to take comfort from declining core inflation, slightly soften its hawkish forward guidance, but remain cautious given the upside risks to food inflation and repricing of the Fed funds rate easing path,'' said Amit Goel, Co-Founder & Chief Global Strategist, Pace 360.
Here are the key indicators to watch out for during the April 2024 MPC:
Inflation:
India's consumer price index (CPI)-based inflation eased to 5.09 per cent in February from 5.10 per cent in January, edging closer to the central bank's target of four per cent. The central bank, in its February MPC minutes-of-the-meeting highlighted that the policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission.
‘’Monetary policy must remain vigilant and not assume that our job on the inflation front is over. We must remain committed to successfully navigating the ‘last mile’ of disinflation which can be sticky,'' said Das in MPC minutes.
Assuming a normal monsoon next year, the MPC members projected CPI inflation for FY 2024-25 at 4.5 per cent with Q1 at 5.0 per cent; Q2 at 4.0 per cent; Q3 at 4.6 per cent; and Q4 at 4.7 per cent. The key sources of upside risks to inflation are geopolitical events and their impact on supply chains, volatility in international financial markets as well as commodity prices.
The central bank has been mandated by the government to ensure that retail inflation remains at four per cent, with a margin of two per cent on either side.
Growth:
India's GDP October-December quarter of FY24 grew at a rate of 8.4 per cent -- the fastest among major economies, which was sharply above RBI's and D-Street's estimates. The record-high GDP print, along with retail inflation, which is still close to the upper band of the central bank's two per cent-six per cent target, does not imply rate cuts, according to most economists.
According to RBI MPC members, the real GDP growth for 2024-25 is projected at 7.0 per cent with Q1 at 7.2 per cent; Q2 at 6.8 per cent; Q3 at 7.0 per cent; and Q4 at 6.9 per cent. Private consumption, which accounts for 57 per cent of GDP, is languishing under the strain of still elevated food inflation.
‘’This is particularly telling in rural areas. Inflation has to be restrained to its target for growth to be inclusive and sustained,'' said Dr. Michael Debabrata Patra, Deputy Governor, RBI in the February MPC minutes.
Also Read: India's FY25 growth outlook looks bright, core inflation on downtrend, says FinMin: 5 key highlights
Liquidity
The liquidity deficit has declined since the last monetary policy in February. However, government cash balances could remain elevated going forward, and while this could harm liquidity, the capital flows in FY25 could pose challenges and opportunities for RBI liquidity management.
According to SBI Research, temporary liquidity injections should replace temporary liquidity withdrawals, and OMO cannot be a tool to counterbalance idiosyncrasies in government cash balances; only VRRR can replace them, according to the report. An open market operation (OMO) is the buying and selling of government securities in the open market.
Barclays stated in an earlier report that the RBI will likely want to avoid a relapse of the weighted average credit rating below/ around the repo rate due to excess liquidity conditions, which implies it may continue to conduct two-way operations as needed.
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Business NewsEconomyRBI MPC meeting begins today: Rate pause may continue on GDP growth, inflation; Key indicators to watch
First Published:3 Apr 2024, 06:06 AM IST
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