The Reserve Bank of India (RBI)-led Monetary Policy Committee (MPC) will unveil its bi-monthly policy decisions on December 6, 2024, at 10:00 am.
The three-day meeting, which began on December 4, is being closely watched. For the first time in more than 30 months, MPC will probably be devoting more time to faltering economic growth.
The central bank has kept the policy rates untouched at 6.5 per cent over the last ten meetings. RBI has been more hawkish on its outlook on inflation due to very high food inflation which has not got successfully anchored. At the same time it has been optimistic about the growth outlook on account of good monsoons and hopes of revival of capex.
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Rate cut unlikely:
Governor Shaktikanta Das has so far ruled out an immediate rate cut even after the RBI adopted a neutral stance in the October meeting as inflation remains above the central bank’s 4% target aim. But a sharper-than-anticipated dip in the July-September period growth to 5.4% is raising worries that the RBI’s restrictive policies may be hurting activity.
Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal have both called for lower borrowing costs in recent months, while some economists are pitching for more action from the RBI to encourage lending to boost growth. Das is under pressure to address inflation and growth challenges as his six-year term comes to an end next week, with no clarity yet on a possible extension.
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Bond traders are pricing in a rate cut soon with yields falling across tenure, and swaps rates, that signal interest-rate sensitivity, sliding.
“We believe a shift in the policy narrative of the MPC is inevitable, starting with acknowledging the growth slowdown and the fact that counter-cyclical support is required,” Teresa John, an economist with Nirmal Bang Institutional Equities Ltd told Bloomberg. The RBI will cut rates only next year, but “we are not completely ruling out” a surprise move now, she said.
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Das & Co may lower GDP forecast:
A 160-basis point miss in the second quarter growth estimates has put the central bank’s forecast of 7.2% for the year through March 2025 at risk. Economists have also pared their growth projections for the year, with Goldman Sachs Group predicting an expansion of 6%, compared to 6.4% earlier.
At the same time, elevated inflation is complicating RBI’s job. Volatile food prices drove headline inflation to 6.2% in October, marking the fastest pace of rise in more than a year.
“This growth-inflation divergence will put the RBI MPC in a bind,” wrote Radhika Rao, an economist with DBS Bank Ltd. in a note this week. She expects the RBI to cut its full-year growth projection by 30-40 basis points and raise inflation outlook from the current 4.5%.
More MPC members may vote for a cut
In the October review, external member Nagesh Kumar voted for a quarter-point reduction. As calls grow to cut interest rates, more MPC members may join him. Madhavi Arora, an economist at Emkay Financial Services Ltd. expects at least two members to vote for lowering the key rate to prop up growth.
Additional liquidity measures expected
Economists say the recent capital outflows and pressure on the exchange rate have added more complexity to the policy outlook. The rupee has been hitting new lows with any monetary easing likely to put further pressure on the local currency by lowering the rate differential with US.
Liquidity conditions remain tight in part due to the central bank’s massive forex intervention and currency leakage from banking system. Core banking system liquidity surplus is estimated to have come down to 1.2 trillion rupees from as much as 4.5 trillion as of end of September this year, according to ICICI Securities Primary Dealership.
To tackle tight liquidity, analysts expect the RBI to deliver a cut in CRR- the proportion of deposits that banks must set aside as cash with the central bank. “This will act as a soft signal for the upcoming monetary easing cycle,” said Upasna Bhardwaj, an economist at Kotak Mahindra Bank Ltd.
One-year overnight indexed swaps have dropped 19 basis points to 6.32% since Thursday’s closing, while five-year swaps are down 18 basis points. “Liquidity infusion through longer term repo window cannot be ruled out as well,” said Churchil Bhatt, executive vice president for debt at Kotak Mahindra Life Insurance Ltd.
Buzz around new RBI Governor
The policy press conference will buzz with questions about Das’ extension or his successor, if there is no clarity on this before Friday. His contract expires on Dec. 10. Back in 2021, when he was last given an extension, the government had announced it more than a month in advance.
(With Bloomberg inputs)
