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PremiumRBI MPC Meeting 2024 Highlights: The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) has kept repo rates unchanged at 6.5 percent. It has also decided to remain focused on the withdrawal of the accommodative stance, Governor Shaktikanta Das said. This is the sixth consecutive unchanged decision and comes after the Interim Budget was announced on February 1, 2024.
RBI Monetary policy — Key highlights
– RBI keeps the repo rate steady at 6.5% with five out of six members voting in favour of the rate decision Experts were also expecting the repo rate to remain steady at 6.5 percent
– MPC also decided by a majority (5 out of 6 members) to remain focused on the withdrawal of accommodation to ensure the inflation progressively aligns with the target while supporting growth. Monetary policy must continue to be actively disinflationary, RBI Governor Shaktikanta Das said in his statement.
– The Reserve Bank of India (RBI) has maintained its inflation projection at 5.4% for 2023–2024.
– CPI inflation is predicted to be 4.5% for the upcoming fiscal year 2024–2025, with Q1 at 5%, Q2 at 4%, Q3 at 4.6%, and Q4 at 4.7%.
The RBI MPC commenced its first meeting of the year on February 6, 2024. Chaired by RBI Governor Shaktikanta Das, the six-member MPC concluded discussions today, February 8, 2024, with Governor Das revealing the committee's decision at 10 am. The 10 am announcement will be followed by a post-policy press conference at noon today, live-streamed on the RBI's YouTube channel or the official X platform (formerly Twitter).
During the last MPC, for the fifth consecutive time, the RBI maintained the repo rate at 6.5 percent. The last adjustment occurred in February 2023, increasing the rate from 6.25 percent.
Turning to inflation, the headline inflation was on 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%, said Ajit Kabi.
Liquidity deficit is a concern. Interbank liquidity has worsened since the Dec’23 MPC meet, causing concerns around pressurizing call rates hovering around the MSF as the government has withheld spending (visible from its huge cash balances) along with more currency in circulation, record tax collections and faster credit offtake than deposit accretion. “One on hand while this accelerates the transmission of rate hikes, the mandate for RBI is to keep its operating target (the weighted average call rates) near the repo rate, not MSF," said Sujan Hajra
On the other hand, we reckon the RBI would take a more proactive approach on the liquidity front given the deeply negative liquidity in the interbank market, added Hajra.
The RBI may review the GDP forecast for FY24 in light of the NSO forecasting 7.3% growth. We do believe it will be lower at 6-6-6.7% and rise marginally to 6.75-6.8% next year. The RBI may however use the NSO growth rate which has also been used in the budget formulation process and provide a projection for next year. That would be something to watch out for.
As per the first advanced estimate of MOSPI, the economy is likely to grow at 7.3% driven by strong investment growth (projected to grow by 10.3%). Industrial growth to expand by 7.9% in FY24 against 4.4% in the previous year. GST collection, E-way bills, and PMI data show signs of healthy growth. Nevertheless, the consumption demand is tepid with a growth rate of 4.4% in FY24 against 7.5% in FY23. 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 stay robust. Against the backdrop of improved economic outlook RBI is likely to increase the growth projection for FY24 to 7.3%, said Ajit Kabi, Research Analyst at LKP Securities.
Going by the RBI forecasts on inflation for the next year, it can be seen that the number will remain above 5% for Q1 of FY25 and come down to 4% in Q2 only. After this period, it would increase to 4.7% in Q3.
Hence there is reason to believe that a rate cut can be considered only in Q2-FY25 after positive indicators on the inflation and monsoon fronts, added Madan Sabnavis, Chief Economist at Bank of Baroda.
Repo cut unlikely; a probable change in liquidity stance. RBI was clear that repo cuts were out of the picture unless headline inflation came down and sustainably remained at the 4% target. Hence, given the current CPI level, the possibility of a rate cut has been ruled out, said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.
“We believe the RBI may keep a status quo on key policy rates, however, the focus on fiscal consolidation in the recent Interim budget by the honourable Finance Minister, may give some headroom to the RBI to change stance to ‘Neutral’ from the current stance of ‘withdrawal of accommodation’," said George Alexander Muthoot, MD, Muthoot Finance.
According to Madan Sabnavis, Chief Economist, at the Bank of Baroda, there is a very high likelihood that the repo rate will remain unchanged again.
The stance of ‘withdrawal of accommodation’ appears to be very likely this time too, he believes, adding that the market is looking for signals to justify a change to ‘neutral’. This stems from the Union Budget or Interim Budget talking of a lower gross borrowing programme for FY25, added Madan.
“We do not expect any change in the inflation forecasts going forward as nothing has changed since the last policy," he said.
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 Ajit Kabi, Research Analyst at LKP Securities.
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.
Narrowing the fiscal deficit target, the government indicated that populist spending or incentives may be avoided in preparation for the forthcoming general election, noted Ajit Kabi, Research Analyst at LKP Securities.
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.
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.
Ajit Kabi, Research Analyst at LKP Securities 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.
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 an improved economic outlook, the RBI is likely to increase the growth projection for FY24 to 7.3%, noted Kabi.
Brokerage house Nuvama in a recent note said it expects MPC to keep the repo rate unchanged at 6.5% this week. 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.
"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.
“RBI is unlikely to precede the Fed in the hiking cycle and will likely follow suit. So mostly towards the latter half of this year is a more probable case of easing," said Madhavi AroraLead – Economist | Emkay Global Financial
According to a report by SBI Research, the Reserve Bank of India (RBI) in its February Monetary Policy Committee (MPC), review meeting is expected to again put a pause on the repo rate.
"We expect the RBI to continue its pause stance in upcoming policy. Strong US non-farm payroll data and wages seem to have pushed back on market expectations for a quick pivot to rate cuts," said SBI Research Report.
The SBI Research Report said that "the first repo rate cut could be on the table from June 2024. “Aug'24 looks the best bet now…."
“The RBI policy meeting will start on Tuesday and it is expected to maintain the status quo in line with the US Fed," said Siddhartha Khemka, Head - Retail Research, Motilal Oswal.
Last year, for the fifth consecutive time, the RBI MPC maintained the repo rate at 6.5 percent. The last adjustment to the benchmark interest rate occurred in February 2023 when it was increased from 6.25 percent to 6.5 percent. The decision for this meeting, following the Interim Budget, is awaited. Notably, this marks the initial MPC of 2024 and the first gathering after the presentation of Interim Budget 2024.
Experts predict the RBI will keep its primary policy rate unchanged for the sixth successive occasion at 6.5 per cent. The RBI MPC's three-day session commenced on Tuesday, with the outcome scheduled for Thursday (February 8).
During the last MPC, for the fifth consecutive time, the RBI maintained the repo rate at 6.5 percent. The last adjustment occurred in February 2023, increasing the rate from 6.25 percent. The upcoming decision, following the Interim Budget, remains uncertain. This marks the first MPC meeting of 2024, following the presentation of Interim Budget 2024. Expectations are widespread that the committee will uphold the current repo rate at 6.5 percent, continuing a trend seen in the past five decisions. This stance aims to align to achieve a 4 percent Consumer Price Index (CPI) inflation target.
The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) commenced its first meeting of the year on February 6, 2024. Chaired by RBI Governor Shaktikanta Das, the six-member MPC is set to conclude discussions today, February 8, 2024, with Governor Das revealing the committee's decision at 10 am on Thursday. The 10 am announcement will be followed by a post-policy press conference at noon today, live-streamed on the RBI's YouTube channel or the official X platform (formerly Twitter).
