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RBI monetary policy today: Rate-pause may continue on GDP print, softer inflation. Key indicators to watch
- The review by the six-member MPC led by Das will likely indicate the course RBI will adopt in the remainder of the financial year as it seeks to strike a fine balance between maintaining growth and keeping inflation within the tolerance zone of 4-6 per cent amid global headwinds.
Reserve Bank of India (RBI) Governor Shaktikanta Das will unveil the second monetary policy of the new financial year 2023-24 on June 8 after a two-day review, as it observes and notes the economic impact of a series of interest rate hikes delivered over the past year.
The review by the six-member Monetary Policy Committee (MPC) led by Das will likely indicate the course RBI will adopt in the remainder of the financial year as it seeks to strike a fine balance between maintaining growth and keeping inflation within the tolerance zone of 4-6 per cent amid global headwinds.
At the last MPC meeting held in April, the RBI paused its rate hike cycle and stayed with the 6.5 per cent repo rate, before which the central bank had cumulatively hiked the repo rate by 250 basis points (bps) since May 2022 due to inflationary pressures led by the Russia-Ukraine war and the remainder effects of the pandemic.
Also Read: RBI monetary policy to be announced this week: A status quo on rates or a cut coming soon?
What lies ahead
The RBI will leave its key interest rate unchanged at 6.50 per cent on June 8 as the median forecasts showed the rate already reached its peak and will stay there for the rest of this year, lower than the 6.75 per cent terminal rate predicted a few months ago, said economists who participated in a poll conducted by news agency Reuters.
‘’The full impact of 250 basis points increase in repo rate undertaken by RBI, since May 2022 is still panning out in relation to the growth versus inflation matrix ,and any charge in the policy rate may require some further examination of the emerging economic parameters, before taking a final view on either increasing or decreasing the repo rate,'' said Jyoti Prakash Gadia, Managing Director, Resurgent India.
‘’A status quo is therefore expected to be maintained in the next policy review meeting of RBI and any change in repo rate may be brought in the later quarters of the financial year. In the meantime the projected GDP growth rate and expected inflation rate may be revised by RBI based on the current scenario,'' added Gadia.
Here are the key indicators to watch out for during the June 2023 MPC:
Inflation:
India's consumer price index (CPI) inflation eased sharply to 4.7 per cent in April 2023, coming under the RBI's upper tolerance limit of six per cent. Despite hitting an 18-month low in April, inflation was not expected to fall to the RBI's four per cent medium-term target for at least another two years, suggesting rate cuts are unlikely in the immediate future.
The April easing in inflation came in due to a steep decline in food prices as the consumer food price index (CFPI) was at 3.84 per cent in April 2023, compared to 8.31 per cent in the corresponding month a year ago. Retail inflation had been above RBI's upper tolerance limit of six per cent since January 2022 which also pushed RBI to adopt an aggressive rate hike cycle from May 2022 to February 2023 policies.
‘’While the moderation in retail inflation will be at the core of RBI’s decision to keep the repo rate unchanged at 6.5 per cent, the elevated inflation in select items of the food basket such as cereals and milk remains concerning. Though the record-high agricultural output bodes well for food inflation, upside risks from El Nino related-weather disruptions continue to persist,'' said Rajani Sinha, Chief Economist, CareEdge.
‘’Moreover, strengthening price pressures in the demand-led components such as housing, personal care, household goods and services will be crucial,'' added Sinha. The RBI governor recently indicated that the May print would be lower than the April numbers. The CPI for May is scheduled to be announced on June 12.
Growth:
India's gross domestic product or GDP grew by 6.1 per cent in the fourth quarter of fiscal year 2022-23, compared to a growth of 4.4 per cent growth in the previous October-December quarter, as per the official data shared by the National Statistical Office. The GDP print surpassed the forecasts of analysts and investors as the Street had expected a growth of 5.5 per cent during the fourth quarter.
For the entire fiscal 2022-23, the economy's growth rate came in at 7.2 per cent, higher than the central bank's recent estimate of 7 per cent. However, the pace of growth was slower as compared to 9.1 per cent recorded in FY22.
In the April MPC, Das projected GDP growth for 2023-24 at 6.5 per cent, which was slightly higher than the previous projection of 6.4 per cent. He further added that Q1 GDP is expected to grow at 7.8 per cent, Q2 at 6.4 per cent, Q3 at 6.1 per cent, and Q4 at 5.9 per cent.
‘’GDP growth for Q4 of 2022-23 came at 6.1 per cent y-o-y versus 4.5 per cent y-o-y in Q3 of FY 2022-23 was higher than the expectation. The growth recovery was led by the services sector, in particular ‘trade hotels and transportation’ and ‘real estate and financial services’,'' said Ashwani Dhanawat, CIO- Shriram General Insurance.
‘’Y-o-Y manufacturing sector growth of 4.5 per cent reflect an improvement in Corporate profits with a reduction in margin pressures. Despite the rate hikes and faster transmission growth recovery has been resilient. Considering the stellar GDP print we are expecting RBI to remain on a prolonged pause,'' added Dhanawat.
CareEdge's Sinha agreed on the view. ‘’On the growth front, the GDP growth in Q4 surprised on the upside with several high-frequency economic indicators pointing to healthy economic momentum. With growth impulses signalling resilience, vigil on the inflation front will influence the central bank’s decision,'' said Rajani Sinha.
Liquidity:
India's banking system liquidity surplus has averaged around ₹600 billion, as of May 22. Further, the central bank's recent decision to withdraw its highest denomination currency note of ₹2,000 from circulation is likely to improve banking system liquidity, bringing down recently elevated short term rates, according to analysts.
Customers holding the ₹2,000 notes can deposit them or exchange them for smaller notes by September 30, 2023. The value of such notes in circulation is ₹3,60,000 crore. Kotak Institutional Equities estimates that liquidity could improve by around ₹10,0000 crore, while QuantEco Research pegs the potential liquidity impact at ₹40,000 crore to ₹1,10,000 crore.
The overnight inter-bank rate eased below the policy repo rate of 6.5 per cent over the last couple of sessions. The short-term interest rates for government securities, bank bulk deposits and corporate borrowings will also likely ease.
‘’As liquidity improves, the monetary policy committee is likely to maintain status quo on rates and stance at least until August,'' Siddharth Kothari, an economist at Sunidhi Securities & Finance told Reuters. CareEdge's Sinha also weighed in on liquidity.
‘’The liquidity surplus in the banking system has increased driven by higher government spending and redemption of G-sec securities. Thus, keeping liquidity close to the neutral level will be an important consideration,'' said Rajani Sinha, CareEdge.
Stance:
In the last MPC, the central bank maintained the 'withdrawal of accommodation' stance highlighting the readiness to act should the situation so warrant and retained the repo rate, but also took note of the turmoil caused by global banking crisis and contagion risks.
Two months later, the Russia-Ukraine war continues to stir global markets with the recent Ukraine dam breach and the oil output cuts by the Organization of the Petroleum Exporting Countries and its allies or OPEC+ still keeps the commodity baskets prone to vulnerability.
In this backdrop, whether the MPC changes its stance from ‘withdrawal of accommodation’ to ‘neutral’ that would signal the markets that the rate-setting panel can act either ways (pause, cut) remains to be seen.
Overview:
The actual decisions made by the RBI, experts said, will depend on various factors, including economic data, inflation trends, global economic conditions, and the prevailing challenges.
President of PHD Chamber of Commerce and Industry Saket Dalmia said, ‘’At this juncture, status quo by RBI will support the demand trajectory in the country and maintain GDP growth on high road''. The government has mandated the central bank to keep the inflation rate at 4 percent (+,- 2 per cent).
Weighing in on the same, Ramnath Krishnan, Managing Director and Group CEO of ratings agency ICRA said that inflation readings have eased, suggesting that April's surprise pause is likely to be extended further in June 2023.
"Growth surprised on the upside as well, ruling out early rate cuts. The market will keenly await cues on liquidity management from the RBI, including the impact that is foreseen from the ₹2,000 notes coming back into the banking system," said Krishnan.
Notably, the World Bank recently slashed India's GDP growth to 6.3 per cent in fiscal 2023-24, down 0.3 percentage points from the previous estimates of 6.6 per cent. In its Global Global Economic Prospects report, the World Bank attributed the constrained private consumption due to high inflation as the main reason for slowdown. Nevertheless, it still expects India to continue to be among the fastest-growing economies in the world.
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Business NewsEconomyRBI monetary policy today: Rate-pause may continue on GDP print, softer inflation. Key indicators to watch
First Published:8 Jun 2023, 06:14 AM IST
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