RBI Policy: Brokerages see continued pause, this is when they expect the first rate cut

Brokerages believe that while the tightening cycle may be ended, the direction and timing of policy rate cuts remain uncertain at this time after the Reserve Bank of India's (RBI) monetary policy committee (MPC) kept the repo rate unchanged at 6.5% on Thursday.

"We see a continued pause being the most likely outcome in upcoming policy reviews as policymakers assess the cumulative impact of the tightening undertaken so far," said brokerage Nuvama Institutional Equities in its report.

As expected by the street, the central bank maintained the repo rate at 6.5%, and the decision was accepted by all the member. However, the RBI did not give any hints about the end of tightening cycle from the perspective of policy. In fact, the MPC has kept its stand of 'withdrawal of accommodation' with a 5:1 majority.

"Resilient growth, but still above target inflation along with continued global tightening, may be the reasons behind the policymakers decision to stick to their monetary stance," said brokerage Nuvama.

RBI Monetary Policy: Repo rate remains unchanged at 6.5%

The policymakers maintained their optimism over the growth outlook, noting that despite global headwinds, domestic demand indicators like as credit growth, passenger vehicle sales, PMI, and capital goods imports remain resilient. 

In light of this, the RBI kept its FY24 GDP growth forecast at 6.5%. At the same time, it was said that the shrinking CAD/fiscal deficit and growing currency reserves provide significant comfort in terms of external stability. While acknowledging the broad-based decline in CPI, the central bank emphasised that it remains above the medium-term target of 4%.

"The RBI is upbeat about economic growth outlook, but its key priority now is to rein in CPI. Further, we do think domestic growth concerns could begin to emerge in coming quarters and expect global slowdown to intensify during the same time and domestic real rates to continue rising even as WPI has slipped into contraction. This will have a bearing on nominal variables in the economy – NGDP, tax collections, corporate earnings and credit growth," added Nuvama in its report.

Brokerage Elara Securities (India) Private Ltd too expects the MPC to remain on a prolonged pause in CY23, while the lag effect of prior hikes plays out, in light of the fact that global central banks, particularly the Federal Reserve, are likely to start reducing interest rates by the end of the calendar year (CY 2023).

"Expect the MPC to undertake first cut in policy rate in Q4FY24 as more durable signals of easing inflationary pressures allow headline CPI trajectory to align with the mandated target. We expect FY24E CPI inflation to average at 4.9 % (RBI 5.1%)," said Elara Securities in its report.

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