RBI MPC meeting begins: Will the central bank wait for the US Fed’s move as the Indian stock market bounces back?

RBI MPC meeting begins: Amid global market turmoil and growing calls for a significant rate cut by the Fed, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) is currently convening to determine the policy rates and stance. RBI Governor Shaktikanta Das will announce the policy outcome on Thursday, August 8, followed by a press conference in which he is expected to explain how the central bank reads the evolving macroeconomic situations in India and globally.

Following Monday's market turmoil and the ensuing calls for immediate and substantial rate cuts by central banks, experts believe the RBI will exercise caution in reducing rates, given signs of stability in global markets. On Tuesday, August 6, the Indian stock market benchmarks, the Sensex and the Nifty 50, each rose by over 1 per cent in the morning session.

There has been a notable shift in the tone of major central banks since last week. US Fed signalled a rate cut was possible in September; the Bank of Japan, on the other hand, raised its key interest rate to 0.25 per cent from a range of zero to about 0.1 per cent.

Experts say that the RBI MPC's rate decision will likely focus more on the domestic growth-inflation dynamics. However, it cannot afford to stay immune to global developments such as the Fed's stance, geopolitical situation and volatile crude oil prices.

Mint gathered insights from experts regarding potential decisions by the RBI's Monetary Policy Committee (MPC) in its August policy meeting. Take a look:

CareEdge

According to rating agency CareEdge, the RBI MPC may maintain the status quo on the policy repo rate and stance.

Risks to the inflationary outlook primarily drive this decision. Although the overall growth rate is expected to remain healthy, the MPC is likely to stay cautious and monitor any emerging risks to inflation, said CareEdge.

YES Bank

Analysts at YES Bank highlight that from the June MPC to now, the most significant change in the global setup is the start of the advanced economies' rate-cutting cycle.

European Central Bank and Bank of England have already reduced rates by 25 bps, while the Fed has signalled a September start.

YES Bank's analysts do not expect the RBI to follow the trend at the August meeting.

The bank pointed out that even as inflation can fall to nearly 4 per cent in Q2FY25, it is expected to move back to 4.9 per cent and 4.6 per cent in Q3FY25 and Q4FY25, respectively.

"The RBI has repeatedly signalled its intention of moving to the 4 per cent target on a durable basis and is likely to wait until this is attained. We expect the RBI to remain on an extended pause until it attains confidence in the inflation trajectory," say YES Bank's analysts.

Nuvama Wealth Management

Nuvama expects the MPC to maintain a status quo on the repo rate (6.5 per cent) given still-strong real GDP growth.

However, the brokerage firm expects the policy stance to soften to ‘neutral' since core inflation has hit a series-low and the monsoon is progressing well.

An accelerated fiscal consolidation glide path in the Union Budget could weigh on demand, especially when corporate profits are slowing. This could be a factor that may cause a change in policy stance. Moreover, the Fed has become dovish amid a sudden weakness in the US labour market.

"We anticipate the RBI will embark on rate cuts, perhaps beginning Q4FY25, with domestic economic momentum likely softening in the coming months. Alongside, we expect the global rate easing cycle to become more broad-based as the US economy weakens," said Nuvama.

Jyoti Prakash Gadia, Managing Director at Resurgent India

The current wave of global policy easing has become pervasive, with the US Fed shifting back to its dual mandate, reviving the soft versus hard landing debate following weak July employment figures.

In parallel, since the RBI's June MPC meeting, a decline in commodity prices has relieved earlier input cost pressures.

While food inflation remains high, it is expected to cool soon, primarily due to short-cycle vegetables; their prices should drop as fresh supplies become available.

Inflation expectations have remained well-anchored and on track with the 4 per cent target.

Despite external fluctuations, core inflationary pressures are subdued.

Given these dynamics, Gadia believes the RBI’s monetary policy should prioritise domestic indicators rather than mirroring the actions of the Fed or other central banks.

The convergence of global developments suggests escalating downside risks to domestic growth and inflation in the coming year and should potentially nudge the RBI towards a rate cut, said Gadia.

Sharad Chandra Shukla, Director, Mehta Equities

“The monetary policy review (MPC) will maintain its status quo as GDP growth is still strong. However, the policy stance may change as core inflation is still not within manageable limits," said Shukla.

Shukla believes the RBI will not make any rate cuts in FY25.

“The market is expecting a cut if we look at the behaviour of bond yields. The benchmark 10-year bond yield is at 6.9 per cent,” Shukla said.

Manish Chowdhury, Head of Research, StoxBox

“Though the repo rate is widely expected to remain unchanged at 6.5 per cent, we will closely monitor the central bank's tone for any hints on the future interest rate trajectory,” said Chowdhury.

Any dovish bias is expected to trigger an upward move in the domestic equity markets.

Chowdhury believes the recent spell of good monsoon would allay the central bank’s fears of sticky food inflation and provide room for a loose monetary policy ahead.

Moreover, the US Federal Reserve looks poised to follow suit with its European counterparts in reducing interest rates, further strengthening the case for the RBI to consider a change in stance in future.

Amit Goel, Co-Founder & Chief Global Strategist, Pace 360

According to Goel, the Reserve Bank of India will likely abandon its hawkish stance and pivot to a neutral stance at its upcoming review on 8 August.

“There are signs that the RBI will signal a policy shift to easing as high real rates are hurting growth, core inflation is at a record low, food-price gains are expected to drop imminently, and liquidity has turned surplus,” said Goel.

The fiscal deficit target has been cut further, and markets are fully pricing in a Fed rate cut by September, which could further strengthen the real effective exchange rate of the rupee in the absence of domestic easing.

Goel expects the MPC to keep the policy rate at 6.5 per cent, which is in line with the consensus view.

“We anticipate the committee will vote to switch its stance to neutral from its hawkish ‘accommodation withdrawal’ stance at the June review,” said Goel.

“This will have a positive impact on equities. It is advisable to book profits and gradually increase allocations in bonds and gold. We believe that, in the future, both bonds and gold will offer better performance opportunities compared to equities,” Goel said.

Suman Bannerjee, CIO, Hedonova

Amid persistent inflationary pressures, particularly rising food prices, the Reserve Bank of India (RBI) is expected to maintain the current benchmark rate, said Bannerjee.

This cautious approach is designed to balance economic growth with price stability.

The RBI aims to mitigate inflation without stifling economic momentum by holding the rate steady.

Bannerjee underscored that rising food prices have significantly contributed to inflation, prompting the central bank to adopt a wait-and-watch strategy.

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