RBI Policy: Rising US Fed rate cut hopes, India GDP, inflation, exit polls - What changed since last RBI policy meeting?
- Since the last RBI policy, the central bank will be evaluating performance of economic activity, trends in inflation, arrival of monsoon, movement of domestic high frequency indicators and international oil prices, and global developments.
The Reserve Bank of India’s (RBI) is expected to keep the benchmark repo rate unchanged at its upcoming monetary policy review meeting, analysts said. The meeting of the RBI Governor Shaktikanta Das headed Monetary Policy Committee (MPC) is scheduled for June 5 to 7.
This will be the first RBI MPC meeting after the Lok Sabha elections results will be announced on June 4. The upcoming RBI policy meeting also comes amid robust domestic economic growth and headline inflation remaining above the central bank’s 4% target, but within the tolerance band.
The central bank last hiked the benchmark repo rate to 6.5% in February 2023 and since then it has maintained status quo on the rates.
“In the upcoming credit policy meeting of RBI, we expect MPC to maintain a status quo. No change in stance is also expected, as RBI will keep liquidity tight to keep short term rate higher and support INR. Liquidity deficit may ease as elections come to an end government spending will see a pick up in the coming months. Further, upward revision to RBI’s GDP forecast for FY25 can be expected. CPI forecasts may not change as of now,” said Sonal Badhan, Economist at Bank of Baroda.
However, a lot has changed since the last RBI policy announcement. Since the last policy, RBI will be evaluating performance of economic activity, trends in inflation, arrival of monsoon, movement of domestic high frequency indicators and international oil prices, and global developments.
US Inflation
Data on Friday showed US inflation stabilised in April, as the personal consumption expenditures (PCE) price index increased 0.3% last month, matching the unrevised gain in March. The PCE price index rose 2.7% year-on-year (YoY), after advancing 2.7% in March.
Softer US inflation data raised bets of an interest rate cut by the Federal Reserve in September. Traders are currently pricing in about a 54% chance of a rate cut by September, according to the CME FedWatch Tool.
Moreover, price cuts by major US retailers and new data showing a slowdown in consumer spending may boost the Fed’s confidence in falling inflation, Reuters reported.
European Central Bank
Investors will now watch out for the European Central Bank’s (ECB) interest rate decision on Thursday, where the central bank is expected to cut borrowing costs by 25 basis points from its record-high levels, according to a Reuters poll.
India GDP
Latest data shows that Indian economic activity continues to remain resilient with annual GDP growth for FY24 revised upward from 7.6% as per second advanced estimates to 8.2% as per provisional estimates. This is also higher than 7% growth registered in FY23.
Inflation
Domestic CPI print for April 2024 shows that inflation remains broadly sticky at 4.8% versus 4.9% in March 2024. As per RBI’s April policy statement, the central bank expects inflation to average at 4.9% in Q1 and then come down to 3.8% in Q2.
“Our study shows that a $10 per bbl increase in oil prices leads to 40-60 bps increase in CPI. It is to be seen if RBI will revise its current inflation forecast of 4.5% for FY25,” said Badhan.
Transmission of rates
The BoB Economist also notes that the transmission of interest rates is better for PSU Banks relative to Private sector banks. In case of PSBs, the transmission on fresh term deposits has seen an increase of 240 bps. On the lending side, transmission still remains as WALR has risen by 208 bps. For private lenders, the increase on fresh deposits is lower at 218 bps and that on loans is at 160 bps.
System liquidity
On an average, liquidity remained in deficit in the month of May 2024 (till 30 May) at ₹1.42 lakh crore, compared with a surplus of ₹20,240 crore in April 2024.
“A part of the reason for pressure on liquidity is limited government spending during the period of general election. We expect RBI to maintain tight liquidity in the coming months as well, to maintain pressure on short-term yields, which may in turn support INR. Thus we expect RBI to keep its stance—“withdrawal of accommodation”—unchanged in the June policy,” Badhan said.
Bond Yields
Since the last policy, the Indian government 10-year bond yields have fallen by 14 bps and are currently trading around the 6.98% mark, compared with 7.09% before the April policy. Bond buyback announced by the central government, limited borrowing in weekly auctions, and improved prospects of normal monsoon in the country, have supported domestic yields so far
Looking at the factors mentioned above, analysts believe that growth fundamentals still remain strong.
“Under these conditions, we expect the RBI to maintain the status quo on rates and stance. We do not expect any significant announcement on the liquidity front either. We also do not expect any change in stance of “withdrawal of accommodation” by RBI,” Badhan said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Business NewsEconomyRBI Policy: Rising US Fed rate cut hopes, India GDP, inflation, exit polls - What changed since last RBI policy meeting?
First Published:3 Jun 2024, 02:54 PM IST
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