RBI policy to be announced today: 6 important things to watch out for in MPC meeting outcome
It is widely anticipated that the RBI MPC will maintain the repo rate at the current level of 6.5 percent. This would mark the sixth consecutive time when the rate remains unchanged.
The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) held a three-day meeting after the interim budget for the first policy decision of the calendar year 2024 and the last one of the financial year 2024. It is widely anticipated that the committee will maintain the repo rate at the current level of 6.5 percent. This would mark the sixth consecutive time when the rate remains unchanged. The decision will aim to support the objective of achieving a consumer price-based inflation (CPI) target of 4 percent. Catch RBI MPC Meeting 2024 Live Updates
"The MPC may keep the repo rate unchanged at 6.5% this week, but may soften its monetary stance to ‘neutral’ from ‘withdrawal of accommodation’. This would be consistent with some softening seen in the domestic economic momentum, and rapid fiscal tightening. However, we do not expect any discussion/guidance on the path and timing of rate cuts just yet. In our view, rate cuts are still distant. After all, headline CPI is still elevated and the RBI seems committed to taming CPI to 4%. That said, the RBI’s actions/guidance on the liquidity front would be closely watched," said brokerage house Nuvama in a recent note.
Read here: RBI MPC 2024: Can the Indian central bank precede US Fed in cutting rates? Experts take on repo rate, policy stance
Key reasons behind this forecast, as per Nuvama are: i) Core CPI is at a comfortable level of less than 4% now. ii) Domestic private consumption and exports are weak, which is also seen in muted growth in the revenues of businesses. iii) Fiscal policy shall tighten rapidly in FY25 as per the Union Budget.
It expects the RBI to indicate the end of tightening (much like the US Fed) by softening its stance, although it does not think the MPC would be in a rush to guide for lower rates yet. After all, India’s headline CPI is still elevated, led by food, and the Fed is still on hold. The RBI’s commentary on liquidity shall be closely watched, added the brokerage.
While the RBI policy is also expected to remain a non-event like the interim budget, let's take a look at 5 trends that will be closely monitored:
Read here: Banking system liquidity deficit down to ₹1.40 lakh crore: Report
Economic growth: According to Ajit Kabi, Research Analyst at LKP Securities, the economy is likely to grow at 7.3% driven by strong investment growth (projected to grow by 10.3%). Industrial growth may expand by 7.9% in FY24 against 4.4% in the previous year. However, the significantly slower growth of consumption demand, which contributes 50% of GDP, raises concern. The agriculture sector is also facing headwinds because of below-average rainfall. Overall the real GDP numbers are likely to stay robust. Against the backdrop of improved economic outlook, the RBI is likely to increase the growth projection for FY24 to 7.3%, noted Kabi.
Inflation: Kabi further stated that the headline inflation was at the higher side of 5.7% in December, driven by higher food prices (especially, pulses, legumes, and spices). However, core inflation is stable at below 4%.
"Higher inflation has been a source of some discomfort for the policymakers with the RBI governor emphasizing that headline CPI needs to revert towards the 4% target. Subpar crop sowing during the winter has been a cause for concern. However, core CPI has been easing consistently, slipping below 4% in December, a post-COVID low, clearly suggesting that the second-round effects of high food inflation have been muted. This should be quite comforting for the policymakers," noted Nuvama, in its report.
Read here: RBI could signal scope for rate cuts in 2024-25
Liquidity management: In the upcoming MPC meeting, the RBI is anticipated to sustain its emphasis on liquidity management, given tight money market conditions where the call money rate hovers over the repo rate.
"In its upcoming meeting, the RBI is anticipated to sustain its emphasis on liquidity management, given the persistently tight money market conditions where call money rates continue to hover above the repo rate. Despite some moderation observed in the past week, liquidity in the banking system has remained in deficit since the last policy meeting, reaching a peak of over ₹3.5 trillion in the last week of January. The deficit in systemic liquidity has consequently tightened overall money market conditions, leading to an inversion in a segment of the yield curve," said CareEdge in a note. An uptick in government spending in the upcoming days is expected to alleviate the deficit in systemic liquidity to some extent. However, the overall liquidity condition is expected to remain tight, it added.
Read here: RBI MPC 2024: ‘First repo rate cut could be on the table…’: SBI Report
Domestic demand: According to Nuvama, rural demand has failed to recover, and some high frequency indicators such as CV sales, electricity generation, fuel consumption, government spending and businesses’ top-line growth have moved to a slow lane. Furthermore, the latest Union Budget points towards steep fiscal consolidation in the coming year, with the Centre’s total spending growing at just 6%, much below the NGDP growth. Against this domestic backdrop, the global monetary backdrop is one where most major central banks have indicated the end of the tightening cycle, although the pace and timing of rate cuts remain rather uncertain.
Fiscal balance: Narrowing the fiscal deficit target, the government indicated that populist spending or incentives may be avoided in preparation for the forthcoming general election, further noted Kabi.
External situation: CareEdge, in a recent report, pointed out that the external environment remains favourable, with narrowing trade deficits and robust foreign exchange reserves. In December, the goods deficit reached a 5-month low of $19.8 billion. Projections for the overall current account deficit for FY24 indicate a modest figure of 1.2% of GDP. The cumulative Foreign Portfolio Investment (FPI) inflows for the calendar year 2023 stand at USD 28.7 billion. Anticipated factors such as India's inclusion in the JP Morgan bond index, potential incorporation in Bloomberg EM Local Currency indices, and the robust performance of the domestic economy are expected to sustain FPI flows in the future, it added.
Read here: RBI Monetary Policy Committee meeting: Check the date, time, and where to watch
Outlook
In conclusion, the economic outlook remains healthy. As core inflation and wholesale inflation are steady, the headline inflation is likely to settle down in the coming periods with the arrival of Rabi harvests.
"Given the tightening liquidity condition, RBI is likely to support economic growth with a cautious stance on inflation. Consequently, we expect an unchanged policy rate and the possibility of a shift in stance to NEUTRAL. Additionally, RBI may take steps to improve liquidity conditions. We expect a policy rate cut by June 2024," said Kabi.
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 taking any investment decision.
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