RBI MPC verdict today: Repo rate to inflation— here are key indicators to watch

Reserve Bank of India (RBI) Governor Shaktikanta Das will unveil the second monetary policy of the financial year 2024-25 today (June 7)—the first one after the high-stakes Lok Sabha election results. In a surprise verdict defying most of the exit polls, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) secured a majority, crossing the 272+ mark required to form the government. 

The RBI Governor will reveal the policy decision after a two-day review meeting amid India's strong macroeconomic indicators. The RBI's rate-setting panel will observe the impact of global headwinds and climate shocks on economic determinants such as gross domestic product (GDP) growth and food prices.

The review by the six-member Monetary Policy Committee (MPC) led by Das will provide a framework for the incoming coalition government and the central bank. The central authorities will adopt the policy stance as a base for the remainder of the current fiscal as they seek to strike a fine balance between sustaining growth and keeping inflation under the four per cent target.

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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 June 5-7 MPC meeting, continuing its stance of ‘withdrawal of accommodation’.

However, the recent weather-related shocks led by the heatwave and soaring food prices are likely to keep the MPC's broad focus on lowering the inflation level, despite record-high economic growth in the previous fiscal (FY24).

"The RBI is expected to maintain its current stance. Although the CPI inflation declined to 4.83 per cent from the previous month’s 4.85 per cent, food inflation remains stubbornly high at 8.7 per cent,'' said Vinod Nair, Head of Research, Geojit Financial Services.

‘’As a result, RBI is likely to maintain the status quo until inflation is brought within the target range of 4 per cent +/- 2 per cent. Other challenges include extreme weather conditions, stock market volatility, and geopolitical tensions,'' added Nair.

The market will focus on the inflation and GDP forecast of FY25. A reduction in inflation and an increase in GDP trajectory will be considered positive. However, according to the market analyst, the chance is low in this policy rather than in the next policy as the new coalition structure, monsoon, and FDA policy are reviewed.

Most analysts argued on the timing of interest rate cuts in 2024. Economists at Nuvama Wealth Management believe that the policy stance may change from "withdrawal of accommodation" to “neutral”.  However, State Bank of India (SBI) Research said that the RBI will maintain the policy stance and the first rate cut will occur in the third quarter of the current fiscal (Q3FY25).

‘’The RBI is set to keep its repo rate at 6.5 per cent at its June 7 review. Policy is turning more restrictive as cooling inflation pushes up real rates, hurting growth. The RBI’s surprise record dividend payment to the government may alleviate concerns about the growth outlook,'' said Amit Goel, Co-Founder & Chief Global Strategist, Pace 360.

‘’Policymakers are likely to put the money to work in new spending in the budget revision due by July. Against this backdrop, we expect the RBI to stay on hold until after the Fed cuts rates. If the Fed waits until September, the RBI will likely wait until October to move. Lower inflation will also open the window for the RBI to ease ahead,'' added Goel.

Here are the key indicators to watch out for during the June 2024 MPC:
 

Inflation:

India's consumer price index (CPI)-based inflation eased to an 11-month low of 4.83 per cent in April, edging closer to the central bank's target of four per cent. The central bank, in its April MPC minutes-of-the-meeting highlighted that India's robust economic growth has given policy space to focus on price stability, however, food inflation risks remain elevated.

"The recent inflation data and the outlook for prices of food and commodities had suggested a status quo on the rates and stance in the upcoming June 2024 monetary policy review,'' said Aditi Nayar, Chief Economist, Head of Research and Outreach at ICRA Ltd.

‘’This has been further cemented by the higher-than-forecast expansion in the Indian economy in Q4 FY2024, which led to the full year GDP growth printing above eight per cent. As a result, the likelihood of a stance change in August 2024 followed by a rate cut in October 2024 has eased, unless an abundantly well distributed monsoon quells food prices in a sustainable fashion,'' added Nayar.

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 growth during FY24 grew at a rate of 8.2 per cent -- the fastest among major economies, which was above RBI's and D-Street's estimates. According to most economists, the record-high GDP print, along with retail inflation, which is at the medium target, does not imply rate cuts.

‘’Though inflation has started receding, the macros would become clearer only after the monsoon season plays out in September. To get a sustainable balance between cyclical consumption driven growth and inflation, Investment growth to propel supply side is key,'' said Sanjay Nayar, President, ASSOCHAM.

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‘’Private more than government. Something to closely watch. In a way, RBI is following the right path for a sustainable economic growth, with a resolve to fight inflation,'' added Nayar.

As per the February MPC estimates, the RBI has projected the real GDP growth for 2024-25 at seven per cent with Q1 at 7.1 per cent; Q2 at 6.9 per cent; Q3 at 7.0 per cent; and Q4 at seven per cent.


Liquidity:

The year-end spending eased liquidity conditions sizably at the start of FY25, with government cash balances reaching as low as ₹900 billion. However, cash balances have built up since April due to lower spending amid general elections. Cash balances have now built up to ₹5.2 trillion (including RBI dividend of ₹2.11 trillion). 

Subsequently, average system liquidity for May now stands at a deficit of ₹1.4 trillion from an average surplus of ₹0.15 trillion in April. While government spending was elevated in April, it seems to have slowed down a bit in May.

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Surplus dividend and elevated cash implies room for government spending to pick-up from July onwards, according to ICICI Bank. Currency demand is expected to decline in Q2 given that it is a seasonal trend. As a result, liquidity conditions are expected to remain tight in the near-term, with the RBI expected to use VRR operations to keep the overnight rates near the policy rate.
 

Overview

Most brokerages and analysts say that India’s macro fundamentals are well placed. However, MPC would be looking at the trajectory of food inflation, which depends upon the monsoon. Notably, the forecast is for good rainfall. 

‘’We believe MPC is best placed to decide it in October by when it will also have more information on how the US Fed cycle is likely to play out. Continuity in government policy and fiscal deficit would be known in July budget. But in July, US Fed is unlikely to do anything in its policy rate,'' said ICICI Bank.

‘’Hence, we expect the change in stance in October followed by rate cut in December. In case of delay in rate cut cycle by the US Fed or change in domestic inflation trajectory, India’s rate cut cycle may get delayed to February or April next year. By March 2025, we expect inflation at 4.5 per cent with further easing in FY26,'' added the private bank in its research report.

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