RBI expected to hold rates for the 5th time in a row, no cuts likely before Q2FY25

• Economists are unanimous on ‘pause’ in rate but a few expect RBI to change stance to neutral.
• Markets will keenly look for guidance on systemic liquidity and Open Market Operations (OMO).
• SBI’s economics team says that as such the first rate cut will not be before the second quarter of FY25.
  
  

The Reserve Bank of India’s Monetary Policy Committee paused its rate hike cycle from February this year but continued with its stance on withdrawal of accommodation. In the upcoming policy, economists expect the MPC to continue to hold rates as inflation has been cooling down. If the MPC holds rates in December, it will be the fifth time that it does that.

While economists are unanimous on a ‘pause’ a few expect the RBI to change its stance to ‘neutral’ from withdrawal of accommodation. However, this may not happen just yet. Says Mandar Pitale, Head- Treasury, SBM Bank India, “Overall data prints released after October MPC are supportive for MPC to continue with its current “withdrawal of accommodation” stance. The MPC is also likely to maintain the status quo on rates in the forthcoming policy announcement.”

The economics team of State Bank of India expects the central bank to keep the repo rate unchanged at 6.5%, although control in CPI demands the lower repo rate. Taking all factors together, this is the time of status quo. It further says that “as such the first rate cut will not be before the second quarter of FY25.

Inflation in India eased to a four-month low of 4.87% in October from 5.02% in September. Food inflation, which accounts for nearly half of the overall consumer price basket, rose 6.61% in October as compared with 6.56% in September. Consumer Price Index (CPI) is also expected to come around 5.4-5.5% by March 2023, though November and December inflation could overshoot 6%. With inflation expected to come down further, MPC is likely to maintain status quo this fiscal.

Market participants will keenly watch out for RBI’s forward guidance on inflation, comments on systemic liquidity going ahead as well as any explanation on not using the structural liquidity tools such as OMO Sales as touched upon in the previous MPC.

While India’s GDP growth has thrown up a positive surprise, the story remains complicated for other developed countries. In the second quarter of FY24, India’s GDP grew by 7.6% against 7.8% it clocked in the first quarter. In contrast, the US economy is in a flux, says SBI. On the one hand US consumers are having an excess savings of $1 trillion and on the other hand its headline GDP is hitting 5% on a regular basis.

Says Parijat Agrawal, Head – Fixed Income, Union Asset Management Company, “We are going into the policy with an improved domestic macroenvironment and benign external factors. Q2 FY24 GDP surprised on the upside, and therefore we expect RBI to revise the projections up for the full year.”

What could influence RBI’s decision making is the US Federal Reserve’s decision on further rate hikes, even though the US 10-year has corrected meaningfully from the peak in line with the incoming data and the central bank narrative. Markets will keenly look for guidance on systemic liquidity and Open Market Operations (OMO).