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The Reserve Bank of India’s Monetary Policy Committee (MPC) is likely to leave the policy repo rate unchanged at its upcoming meeting due to robust growth momentum even as it keenly awaits retail inflation to move to the 4 per cent target on a durable basis.
The six-member MPC has been on pause mode for over 15 months now. The last time there was a rate action on February 8, 2023, when the repo rate was upped from 6.25 per cent to 6.50 per cent.
The committee is scheduled to meet from June 5 to June 7. This will be its second meeting of FY25.
FY24 ended on a high note for the economy, with GDP growing at 8.2 per cent against 7 per cent in FY23.
Though retail (consumer price index-based) inflation softened to an 11-month low of 4.83 per cent in April from 4.85 per cent in March, it remains above the MPC’s 4 per cent target.
Considering the growth-inflation dynamics, the committee may prefer to stand pat on the repo rate. Repo rate is the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches. The MPC is also likely to persist with the “withdrawal of accommodation” stance.
GDP growth
Referring to the GDP print (of 7.8 per cent in Q4/January-March 2024 and 8.2 per cent for FY24), Shreya Sodhani, Research Analyst, Barclays Investment Bank, and Amruta Ghare, Economist, Barclays Securities (India) Pvt Ltd, said this suggests that growth is moving faster than expected by the RBI.
“This means the central bank should see little urgency to cut rates while the MPC waits for comfort on headline inflation.
“In our view, the MPC will likely vote 5-1 to keep the policy mix unchanged at its upcoming meeting. We continue to expect the window for a rate cut to open only in December 2024, with the central bank noting solid growth, which allows it to focus solely on inflation,” they opined.
While Sodhani and Ghare expect four 25 basis points cuts by the RBI, they see risks of a shallower cycle if the growth outlook remains robust.
Sonal Badhan, Economist, Bank of Baroda, emphasised that as economic activity remains broadly resilient, RBI will remain in wait and watch mode.
“We believe that RBI may revise its GDP projections upward in the upcoming policy meet.
“We expect GDP growth to moderate to 7.3-7.4 per cent in FY25. Our slightly higher than RBI’s 7 per cent growth forecast is based on premises of recovery in consumption and private investment,” she said.
Badhan expects headline CPI to settle at 4.5-5 per cent in FY25, with risks tilted to the upside.
Retail inflation
“Ongoing heat conditions in the country and trajectory and timing of monsoon rains in major crop-growing States will be critical. Further, considering retail inflation has remained sticky so far, we await RBI’s decision to revise its current forecasts (4.5 per cent for FY25).
“Under these conditions, we expect RBI to maintain status quo on rates and stance. We do not expect any significant announcement on liquidity front either. We also do not expect any change in stance of “withdrawal of accommodation” by RBI,” Badhan said.
DMI Finance Economists said the still elevated food inflation implies that the RBI will likely continue to sound cautious in their communication in the upcoming monetary policy meeting.
“Strong domestic growth along with cooling of the crude oil prices will provide the policy space to remain on pause in June. Based on the minutes of the previous meeting, the MPC members will likely wait and watch the progress of the South-West monsoon to judge its impact on the food prices.
“Further, with market expectations of the Fed rate cut being pushed out to September and our own judgmental assessment seeing September or November as the earliest possible timing for lower US policy rates, the RBI opting for a rate cut earlier than that seems highly unlikely,” they said.
DMI Finance economists continue to believe that the room for substantial cuts will be limited in FY25 given that headline inflation is expected to accelerate again towards the end of the year.
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