RBI will take center stage on Thursday as it will present the second bi-monthly monetary policy for FY24. The chances of a rate cut are low in this policy, as the majority of experts believe RBI will keep the repo rate unchanged and focus on the impact of an intense rate hike cycle across industries. Also, the latest economic-inflation mix hints at a second status quo.
As per, Indranil Pan, Chief Economist, Yes Bank, the evolving growth-inflation mix indicates a continued pause from the RBI in June. The RBI had paused in April, clearly indicating that the markets should not construe the same as a “pivot”.
India's central bank started fiscal FY24 with a status quo in the rate hike cycle.
Earlier, in the first bi-monthly policy of FY24 (April 2023), RBI kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. Subsequently, it also kept the standing deposit facility (SDF) rate unchanged at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate were also unchanged at 6.75%
The economist added, "The upside surprise seen in the latest released GDP numbers Q4FY23 show that the economy is resilient even as private consumption expenditure remains on the slow track. YoY headline CPI inflation has come down and we anticipate the softening bias to continue. However, the more significant reason for the reduction in the CPI is the high base of last year. Price pressures continue to exist, as is also evident in an 8.1% mom jump in the vegetable prices for May. On the other hand, there is still a hawkish tilt to the US Fed policy, and AE policy interest rates are expected to continue to rise, given that respective inflation levels are still quite high compared to the targets."
In April 2023, CPI inflation eased to 4.7% which is the second consecutive month where this economic indicator has stayed below RBI's upper tolerance limit of 6%. Inflation has been above RBI's upper tolerance target from January 2022 until March 2023 where the retail inflation experienced a decline to its lowest point in the past 15 months.
Further, India's GDP growth rate was better than expected at 7.2% in FY23. In the fourth quarter of this fiscal, the economic growth was at 6.1%, which was higher than estimates as well.
On similar lines, Manish Chowdhury, Head of Research Stoxbox said, "Against the backdrop of consumer price inflation easing to an 18-month low in April, we expect the RBI to take a status quo stance at its monetary policy decision due tomorrow. With the repo rate expected to be held at 6.5%, we foresee similar policy actions in due course especially considering the recent remarks of the RBI Governor that May’s inflation print would be further lower. This actually indicates that previous interest rate hikes are percolating through the economy and are having the desired effects."
During fiscal FY23, RBI has hiked the repo rate by 250 bps points since May last year, which had led to a significant jump in banks' lending and deposit rates. The reason behind this would be that rate hikes usually lead to a spike in the cost of funds for banks and hence the lenders pass on the impact to end borrowers.
Chowdhury added, "We would closely watch the RBI’s commentary on the liquidity management front since the Rs. 2,000 notes are making their way back into the banking system along with its reading of the monsoon and global economic conditions. With the Indian economy looking on a firmer footing, we do not think that the RBI would commit itself to an early rate cut in the near future as some of the previous rate cuts are still making their effect felt on the demand side of the equation."
Also, Assocham believes RBI Monetary Policy Committee to keep its benchmark REPO rates unchanged, in the backdrop of the prevalent scenario marked by continuing volatility in global commodity prices, financial markets and supply chain constraints, besides domestic factors like Monsoon prospects.
''While retail inflation eased to an 18-month low of 4.7 per cent in April this year and may even drop further, RBI is likely to wait how Monsoon plays out. It is not only the agricultural output and rural demand which gets impacted by Monsoon but the overall inflation trajectory gets significantly impacted by the rains. So, it would be fair to assume RBI would stick to the existing REPO rate of 6.5 per cent, " ASSOCHAM Secretary General Deepak Sood said.
Sood said, besides the policy rate, ''we would be keenly watching the stance with regard to future trajectory''. The RBI has presently been in the withdrawal of accommodation which was brought in following the outbreak of Covid 19 pandemic."
Among key factors as per Assocham are -- Shaktikanta Das' commentary on the state of global banking and financial risks, health of Indian banks and the emerging new financial architecture, which is credited with navigating the country's monetary environment with a pragmatic approach during the challenging times since Covid and extreme tight money stance by most of the central banks in the world,
Finally, Yes Bank's economist said, “we expect the RBI to stay on a pause in June, the next move is surely a cut. However, we might have to wait till around the February 2024 MPC meeting for this cut.”
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