RBI may keep rates unchanged, cut likely in December: Mint Poll

Mumbai: The Reserve Bank of India's rate-setting panel may keep the benchmark interest rate unchanged for a ninth consecutive time on Thursday, at a time lower rates gain favour among global central banks.

All 15 economists and treasury heads polled by Mint expect the six-member Monetary Policy Committee (MPC) to hold the repo rate at 6.5%, while 12 of them see the committee keeping the policy stance unchanged at ‘withdrawal of accommodation’. The MPC will meet from 6 to 8 August.

In the last MPC meeting in June, four members voted for a status quo, while two members–Ashima Goyal and Jayanth R. Varma–voted to reduce the repo rate by 25 basis points and changing the stance from withdrawal of accommodation to neutral.

 

“I think that the RBI will be very critically targeting the 4% levels for CPI inflation," said Indranil Pan, chief economist, Yes Bank. “Thus, there is no need to follow the Fed, especially as the RBI numbers indicate that inflation will be lower in Q2 and be in the handle of 4% or even lower. But, Q3 and Q4 are expected to see increases in inflation levels in India."

Last week, the US Federal Reserve signalled the possibility of a September cut, while Bank of England lowered rates for the first time in four years.

“The concern on food inflation may also sustain as a) spatial distribution of rainfall is not good, b) vegetables have been on the higher side in June and July 2024, c) rice sowing is below last year’s level d) month-on-month growth in protein-rich food items has been high," Pan added.

CPI inflation

Since the last meeting, food price pressures halted the disinflationary trend in the headline rate in June. Consumer price index-based inflation spiked to 5.1%, higher than the May headline of 4.8%, owing to the sharp rise in perishable food prices following the heatwave and the slow start to monsoon.

While the number is likely to reverse from July owing to the base effect, economists expect retail inflation to miss RBI's inflation target for second quarter at 3.8%. That said, the central bank will keep the FY25 inflation target unchanged at 4.5%, according to economists.

"As far as CPI inflation is concerned, we think there could be some upside risks to RBI’s forecast of 4.5% average for FY25, particularly after the July telecom tariff hike, but it is not clear to us whether the RBI will revise its CPI forecast higher at this stage," said Kaushik Das, chief India economist, Deutsche Bank.

“Our own CPI inflation forecast for FY25 is slightly higher at 4.6% average, factoring in the telecom tariff hike and other risks, particularly related to food inflation."

Fiscal consolidation

The MPC will also take comfort from the Union budget for maintaining its commitment to fiscal consolidation. The government lowered its fiscal deficit target for FY25 to 4.9% of gross domestic product (GDP) from 5.1%, as announced in the interim budget. Since June, bond yields have gone down by 15 basis points and liquidity has turned surplus.

While RBI governor Shaktikanta Das had categorically stated in the last MPC meeting that the committee will not be guided by Fed action, economists believe that emerging market central banks like RBI will not be able to completely ignore the Fed action.

“A softer Fed will spill over to the reaction function of EM central banks, including that of RBI and could influence the timing of the first rate cut by the RBI," said Madhavi Arora, lead economist at Emkay Global Financial Services.

“Besides, the RBI has no merit in keeping rates higher and attracting global carry trades at a time when they are already managing a problem of plenty with FX management and surplus liquidity management, amid FPI flows and domestic money market dynamics," Arora said.

However, in an interview with CNBC-TV18 last month, Das cautioned that with retail inflation still above the 4% target, any talks about cutting interest rates would be too premature.

That said, most economists expect RBI to start the rate cut cycle only in December.

"We continue to expect the window for a rate cut to open only in December 2024, but see the risks that the first cut will be delayed into 2025. Recent communication by the RBI has turned increasingly cautious over elevated food inflation, which continues to prevent durable disinflation in the headline rate," said Barclays in a report.

Since the last policy in June, RBI has been selling government securities (G-Secs) through open market market operations (OMO) to suck out excess liquidity in the system. The central bank has sold nearly ₹10,000 crore of G-Secs through this window. OMO refers to the sale or purchase of government bonds by the RBI to manage liquidity. The system liquidity surplus is above ₹1 trillion over the last two months.

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