Market anticipation for the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) meeting is low. On February 6, the central bank MPC, led by RBI Governor Shaktikanta Das, convened in Mumbai for a three-day discussion. This is the first meeting of the 2024 MPC and the first gathering following the release of the interim budget.
For the sixth time in a row, experts predict that the RBI will maintain its key policy rate at 6.5%. The RBI MPC's three-day meeting began on Tuesday, and its conclusion is expected on Thursday, February 8.
This time, will the repo rate change in any way?
The Bank of Baroda's Chief Economist, Madan Sabnavis, believes there's a very good chance the repo rate won't move from its current level.
When will rates be changed by the RBI?
"Even though the RBI formally targeted inflation, we have long maintained that its policy has been somewhat pegged to the Fed, particularly in the last two years." In the past two years, the RBI has quickly changed its stance and taken actions that were solely motivated by external factors (see some of its most notable hawkish turns, such as Ex. 1). Madhavi Arora, Lead Economist at Emkay Global Financial Services Ltd., stated that "the policy prerogative has essentially been to ensure financial stability amid fluid external dynamics, even as the policy narrative has been domestic - implying the aim of financial stability may have even preceded inflation management in the last two years."
Can the RBI Outshine the Fed?
“We are aware that the RBI must be adaptable in light of the evolving discussions surrounding global narratives. EMs, including India, now have a comfortable breathing room to offer higher risk premia due to a rapid shift in risk appetite and low volatility in risk assets. Currently, markets are pricing in a roughly 60% chance of the first Fed cut by May 24 (CY-24, 117bps drop) [Ex. 2]. In addition, domestic policy normalization is anticipated by February 24, with two cuts in June 24 and October 24. We believe that any early move towards significant main DM central bank easing this year may be slowed by factors like: 1) US inflation trends taking time to identify; 2) economic resilience; and 3) easier financial conditions feeding back into demand. This should also prevent the RBI from making an early reduction. As of right moment, the Fed is expected to refrain from making rate cuts before June 24. The RBI will lag behind. We continue to believe that in CY24, the RBI will not reverse policy before the Fed," said Madhavi Arora.
Should the position be formally changed?
According to Madan Sabnavis, the position of "withdrawal of accommodation" seems highly plausible this time as well.
However, the market is searching for indications to support a shift to "neutral." Madan continued, "This is a result of the Union Budget or Interim Budget discussing a lower gross borrowing programme for FY25."
"The RBI changed the stance to 'withdrawal of accommodation' in April 22 and added SDF to its liquidity management toolkit. The stance has been loosely linked to liquidity behaviour." Although system liquidity was generally controlled in 2023, Arora noted that from August 23, the interbank call rate has been higher than the repo rate.
Considering that MSF has been receiving call money rates for the past four months, the accommodating position is theoretically already being scrutinized. Therefore, a shift in position might wait until April, she continued, giving the RBI some leeway to comprehend and adapt to changes in the world economy.
"We think the RBI might maintain the status quo on key policy rates, but the honorable finance minister's recent interim budget's emphasis on fiscal consolidation may give the RBI some leeway to shift from its current stance of "withdrawal of accommodation" to "Neutral," according to George Alexander Muthoot, MD, Muthoot Finance.
Regarding the Inflation Estimate
The chief economist of BoB stated, "We do not anticipate any change in the inflation forecasts going forward as nothing has changed since the last policy."
Potential Rate Reduction
According to the RBI's predictions for inflation in the upcoming year, it will be more than 5% in Q1 of FY25 and only 4% in Q2. Following this time frame, it would rise to 4.7% in Q3.
Accordingly, Madan Sabnavis continued, there is cause for optimism that a rate cut can only be taken into consideration in Q2-FY25 following encouraging signs on the fronts of inflation and the monsoon.
Repo cut unlikely; shift in liquidity position likely. The RBI made it quite evident that repo rate decreases would not be considered unless headline inflation decreased and was stable at the 4% objective. The idea of a rate drop has therefore been ruled out given the current level of the CPI, according to Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.
Regarding GDP Projections
Given that the NSO is predicting growth of 7.3%, the RBI may reconsider the GDP prediction for FY24. We do think that it will be a little higher at 6.75–6.8% next year and lower at 6–6–6.7%. Nonetheless, the RBI may predict for the following year using the NSO growth rate, which was also taken into consideration during the budgetary process. That's something to be cautious about.
According to the MOSPI's first advance estimate, robust investment growth—which is predicted to expand by 10.3%—will likely propel the economy's 7.3% growth rate. In FY24, industrial growth is expected to increase by 7.9% as opposed to 4.4% in FY23. PMI statistics, E-way bills, and GST collection all indicate robust development. However, the growth rate of the consumption demand is low, growing at 4.4% in FY24 compared to 7.5% in FY23. Concern is raised by the consumption demand's noticeably slower growth, which accounts for 50% of GDP. The below-average rainfall is posing challenges for the agriculture sector as well. The actual GDP figures continue to be strong overall. According to Ajit Kabi, Research Analyst at LKP Securities, RBI is expected to raise the growth estimate for FY24 to 7.3% in light of the improving economic outlook.
Regarding Liquidity
The lack of liquidity is a worry. Since the MPC meeting on December 23, interbank liquidity has gotten worse, raising concerns about pressurizing call rates that are hovering around the MSF due to government spending being withheld (as seen by its large cash balances), more currency being in circulation, record tax collections, and faster credit offtake than deposit accretion. Sujan Hajra stated, "On the one hand, while this speeds up the transmission of rate hikes, the RBI's mandate is to keep its operating target—the weighted average call rates—near the repo rate, not MSF."
However, given the extremely low liquidity in the interbank market, we believe the RBI will be more proactive on the liquidity front, Sujan continued.
UPI-enabled gold-linked Credit Line
Banks provide overdraft credit lines to businesses, but they do not offer small credit lines to the general public that can help with short-term monthly financial needs. As a result, the average person either keeps a sizable amount in a savings account or uses a credit card or personal loan to cover unexpected gaps in monthly expenses.
George Alexander Muthoot stated, "For the average person, we think a "gold linked credit line via UPI" will be perfect. The first step in doing this is for NBFCs to expand the UPI linkage (payment system). If this is approved, NBFCs that offer gold loans can then offer credit to regular people. This product will function similarly to a secured credit issued by NBFCs and will also attract a reduced interest rate (of 12%-18%) as opposed to a higher interest rate (of ~36%) on a credit card."
Headline Core inflation is steady but Inflation is a Worry
When it comes to inflation, the headline rate was 5.7% in December, primarily due to rising food costs (particularly for pulses, legumes, and spices). Ajit Kabi stated that core inflation is steady at less than 4%.
