RBI MPC Meeting: What happens if the central bank cuts interest rates tomorrow? D-Street experts weigh in
- RBI MPC Meeting: For the December meeting, D-Street experts are divided on whether the rate-setting panel will maintain its stance on the key interest rates or go for its first policy reduction since February 2023.
RBI MPC Meeting: Reserve Bank of India (RBI) Governor Shaktikanta Das will unveil the fifth monetary policy of the current financial year 2024-25 (FY25) on Friday, December 6, after a three-day meeting that began on December 4, 2024. The policy review by the six-member Monetary Policy Committee (MPC) led by Das has its work cut out for itself after recent worrying prints of headline inflation and gross domestic product (GDP).
In its last policy meeting, the MPC kept the benchmark repo rate unchanged at 6.5 per cent for the tenth straight meeting. However, the MPC changed the monetary policy stance to ‘neutral’ from ‘withdrawal of accommodation’ in the October meeting. For the December meeting, D-Street experts are divided on whether the rate-setting panel will maintain its stance on the key interest rates or go for its first policy reduction since February 2023.
Also Read: RBI MPC Meeting: What does India’s Q2 GDP print mean for the monetary policy? Experts weigh in
RBI MPC to adopt a ‘balancing act’ in December review
India’s GDP growth in the July-September quarter of the current fiscal (Q2FY25) was below D-Street estimates at a near two-year low of 5.4 per cent YoY, with the deceleration led by moderation in investment spending and slowdown in manufacturing and mining sectors.
Economists say even as H2 growth picks up to around 6.5 per cent, growth is expected to be below potential in the near term and requires a policy push. According to ICICI Bank research, the MPC would have to revise its FY25 growth forecast lower from 7.2 per cent year-on-year (YoY).
In October, India’s retail inflation accelerated to a 14-month high of 6.21 per cent YoY. The increase is driven by food inflation which moved to a 15-month high of 10.9 per cent YoY. Within food inflation, vegetable prices were running at a 57-month high of 42 per cent YoY.
Q2 GDP data and October's inflation print have likely made the RBI's task trickier for the upcoming policy meeting on whether to cut repo rates to support growth or wait for inflation to reach its target levels consistently.
“The recent data points on higher inflation of 6.21 per cent in October and lower GDP growth of 5.4 per cent in Q2 puts RBI in a tricky position, acting as a dampener to hopes of a rate cut," said Suresh Darak, Founder, Bondbazaar.
According to Darak, while pressure would mount on the RBI to cut rates to boost growth, the recent higher inflation and the weakening of the INR against the dollar over the last couple of weeks would also affect the MPC and may hold them back.
"The benchmark 10 yr G-sec though has decreased by ~10 bps since the GDP data, signalling that a section of the market believes that the RBI may just give in on the rate cut. It will be interesting to see RBI again doing the balancing act this week," added Darak.
What will happen if RBI cuts interest rates?
D-Street's popular vote is that RBI’s view on inflation control has been focused on curbing inflation in a durable pattern so that economic growth can be sustainable and broad-based after the rate-cutting cycle begins.
Also Read: RBI Policy: MPC meeting begins today; will the central bank cut the repo rate? Experts weigh in
Hence, amid the high cost of living, most experts believe the central bank will maintain the status quo on interest rates amid huge stress on microfinance institutions (MFIs) and economically weaker populations. Experts also believe a rate cut in the upcoming policy would ‘create a larger asset bubble’.
"The case in point is, would RBI start its rate-cutting cycle in this MPC? Our in-house view is RBI would maintain the status quo on the policy rates in this meeting but would give a clear indication in the governor’s post-policy statement on the path the MPC would like to take on the policy rates going forward," said Ajit Banerjee, President & Chief Investment Officer, Shriram Life Insurance Company Ltd.
“We are also seeing huge stress on the MFI segment and the financially less endowed urban population, who are highly leveraged. At this stage, a larger asset bubble can be created if rate cutting is done and guards are held loose. The RBI would also like to see trade and monetary policy with the new government in the US, what they would adopt, and what potential ramifications for India, and decide its course of action if felt necessary,” added Banerjee.
Harsimran Sahni, Executive Vice President and Head of Treasury at Anand Rathi Global Finance believes that after the '"lowest GDP growth in the last seven quarters, all the binoculars are now fixed on RBI’s MPC Policy".
According to the expert, RBI's policy could be dovish with rate-cut guidance. The pressure was built after the inflation data also saw a sudden increase (both CPI and Core CPI). The increase in inflation may very well be a seasonal pattern, but Governor Das has consistently emphasized the threat that inflation could pose for the economy if left untamed.
"Nevertheless, we understand the significance of the GDP data, which came well below expectations. Therefore, the probability of a rate cut in the December policy is equal to the flip of a coin," added Sahni.
Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services Limited, does not think there will be any action since inflation is at ~six per cent. However, the probability vis-a-vis a day ago has certainly risen. According to Gupta, a rate cut in February 2025, though, is very much alive, provided inflation comes off.
"The high-frequency data suggests that festive-linked revival in activity may provide a marginally better 2H growth figure. Still, overall GDP growth for FY25 will be around 100 bps lower than RBI’s estimate of 7.2 per cent. Despite the sharp slowdown in GDP growth, we maintain our view of a pause by the RBI given elevated inflation and an uncertain global environment," said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, and not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
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Business NewsEconomyRBI MPC Meeting: What happens if the central bank cuts interest rates tomorrow? D-Street experts weigh in
First Published:5 Dec 2024, 09:42 PM IST
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