RBI Monetary Policy preview: Could the central bank signal the end of the tightening cycle?
The Reserve Bank of India's Monetary Policy Committee is expected to hold the policy repo rate at 6.5% in its second bimonthly meeting for fiscal 2023-24, according to brokerage Nuvama Institutional Equities.
In its most recent research report, brokerage Nuvama Institutional Equities stated that the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) is expected to continue the pause on June 8 and hold the policy repo rate at 6.5% in light of the easing of inflation.
The second bimonthly monetary policy for fiscal 2023–24 will be discussed at a three-day meeting of the RBI's MPC starting today, June 6. Shaktikanta Das, governor of the RBI, will make the panel's conclusion public on June 8.
The MPC retained the repo rate at 6.5% in its first bimonthly policy meeting for the new fiscal year 2023–24 (FY24), which was held on April 6. Since last May, the repo rate has already been increased by a total of 250 basis points in an effort to bring down in inflation.
The brokerage firm noted that the setting is April's CPI inflation of 5%, which is expected to slow down even further, in contrast to the real GDP growth that was a welcome surprise in Q4FY23. The combination of indications allows RBI room to keep an eye on the incoming data before changing directions. It might now change from 'withdrawal of accommodation' to 'neutral' if inflation continues to moderate, believes the brokerage.
"A big comforting factor for the policymakers is inflation’s momentum fading. Headline CPI is now below 5% with several components showing easing trend. Simultaneously, input price pressures have receded sharply, hinting at the possibility of core goods CPI too moderating. Put together, the MPC maintaining its stance in its upcoming policy review seems quite likely. Yet, policymakers will be unrushed to reverse course," said the brokerage in its report.
The brokerage also pointed out that although nominal gross domestic product (NGDP) growth has returned to 10% year-over-year (YoY) from 17-18% a few quarters ago, real GDP growth has been stronger than anticipated. Consumption has lagged below forecasts, and the 10% growth in NGDP was only made possible by favourable terms of trade (a declining external deficit).
Real rates are rising, the global downturn is getting worse, and the brokerage expects that the effects of previous monetary tightening will continue to be felt throughout the economy in the future. Monetary policy also acts with long and unpredictable lags. Also continuing to tighten is fiscal policy. The following quarters should therefore see an increase in growth concerns.
"In view of the pulls and pushes discussed above, we expect a continued pause from the MPC. However, we do expect the committee to shift its monetary stance from 'withdrawal of accommodation' to 'neutral', signalling the end of the tightening cycle. After all, external deficit (CAD) and inflation both have subsided significantly. That said, the RBI may not reverse course anytime soon," said the brokerage in its report.
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