RBI Policy: Governor Das unlikely to precede Fed in policy reversal; expect rate cut only in H2, say Economists

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on Thursday decided to keep its key policy rates unchanged, in line with the expectations. 

While maintaining the stance of “withdrawal of accommodation”, RBI Governor Shaktikanta Das highlighted that stance should be seen in the context of “incomplete transmission and inflation ruling above the target of 4% and our efforts to bring it back to the target on a durable basis.”

The RBI governor reiterated its commitment to remain vigilant of the evolving liquidity situation and ensure that money market interest rates evolve in an orderly manner and financial stability is maintained.

Read here: RBI Policy: Governor Shaktikanta Das keeps repo rates unchanged at 6.5%; remains focus on ‘withdrawal of accommodation’

Economists believe that the RBI is most likely not in a hurry to ease rate and stance and expect the rate pause mostly to be extended for now. Most of the economists expect a repo rate cut only in the second half of calendar year 2024.

“The MPC decision to keep policy repo rate at 6.50% by a wide majority (though not unanimously) indicates the unwavering regulatory commitment to remain focused on withdrawal of accommodation, ensuring inflation progressively aligns to the target, while supporting growth,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

He believes the major announcements point to a nuanced growth oriented mindset while simultaneously fortifying the financial landscape against any shock; exogenous/in-house as key tenets are being aligned with the evolving global best practices.

Madhavi Arora, Lead Economist at Emkay Global Financial Services said that the RBI policy tone stayed largely neutral amid comfortable macro and market backdrop.

“A benign global narrative, tighter system liquidity and easing core inflation despite stronger growth acted as comfortable backdrops to today’s MPC meeting, albeit with a 5-1 vote split on rates. The policy tone was confident on domestic dynamics and on meeting external financing needs, with growth upgrades and comfortable inflation trends despite near-term food-led risks,” said Arora.

Also Read: RBI MPC 2024: Global trade momentum weak, disruption in Red Sea impart uncertainty, says RBI Governor Shaktikanta Das

Expectedly, there was no change in stance of “withdrawal of accommodation”. We understand the RBI would be biased towards keeping overnight rates more aligned towards the repo rate than MSF/SDF ahead. A part of this would be naturally achieved ahead, she added.

Arora expects the stance change may come only beyond April and will give the RBI some elbow room to understand and adjust to fluid global dynamics. She does not see the need to do any CRR cut or OMOs (Open Market Operations) for near-term liquidity fine tuning. 

“As market debates swing on timing/quantum of global rate cuts ahead, the RBI’s mention of ‘markets running ahead of central banks’ strengthens our view that domestic policy reversal will be a function of fluidity of global narratives. While the RBI will stay vigilant on macro and financial stability, it is unlikely to precede the Fed in any policy reversal in CY24,” Arora said.

Sonal Badhan, Economist, Bank of Baroda expects the earliest possible change in RBI’s position only in June 2024, that too if inflation falls significantly below RBI’s expectations. 

“If inflation follows RBI’s trajectory then no change in position can be expected before August 2024,” Badhan said.

Also Read: RBI MPC decision: RBI may only get to cut rates around the August meet; here's why

YES Bank Chief Economist Indranil Pan is of the opinion that the ‘higher for longer’ story stays strong and relevant. 

“Assessing the growth-inflation dynamics, we think that the RBI may only get a chance to cut rates around the August 2024 policy, but some risks have started forming on a delay even to this date,” Pan said.

Rajani Sinha, Chief Economist, CareEdge Ratings feels that RBI would remain cautious given the risk posed by high food inflation. Healthy economic growth gives room to the central bank to maintain the status quo for some more time. 

“However, in the second half of the year, as domestic inflationary concerns recede and the US Fed starts cutting rates, we can expect a shallow rate cut by RBI. On the liquidity front, RBI will continue to intervene through appropriate tools as required,” Sinha said.

GDP growth

RBI expects 7% GDP growth in FY25 following 7.3% growth in FY24 (as per NSO’s advanced estimates). The central bank revised quarterly projections upward, with growth in Q1 now estimated at 7.2% versus 6.7% in December 2023 policy, Q2 at 6.8% as against 6.5% earlier, Q3 at 7% versus 6.4% earlier and Q4 at 6.9%. 

“Robust growth in FY25 predicted on the back of resilience shown in services activity, continued profitability of the manufacturing sector, likelihood of increased consumption demand, steady Rabi sowing, and government retaining focus on capital expenditure. Downside risks may emerge from escalation of geopolitical tensions and volatility in international financial markets,” Badhan said.

Badhan believes RBI’s FY25 growth projection to be slightly more optimistic and retains her estimates at 6.75- 6.8%.

Also Read: RBI Monetary policy: Repo rate steady at 6.5%, FY24 inflation forecast unchanged at 5.4%; check for 10 key highlights

Inflation

RBI has retained its CPI inflation projection at 5.4% for FY24, but has lowered the Q4FY24 estimate from 5.2% to 5%. For FY25, the Central Bank expects inflation to come in at 4.5%, with Q1 estimates reduced to 5% from 5.2% earlier, Q2 at 4%, Q3 at 4.6% and Q4 at 4.7%. 

The downward revisions have been made as RBI remains confident that Rabi sowing has been satisfactory this season, and vegetable prices are also on a downward trajectory now. Further, these numbers are also based on the assumption of normal monsoon in FY25. 

Upside risks to these forecasts may emerge on account of volatility in international commodity prices and in particular oil prices, Badhan noted. 

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