As the newly formed Reserve Bank of India (RBI) Monetary Policy Committee (MPC) is set to announce its first decision on Wednesday, expectations are largely that it may lay the ground for an interest rate cut.
A recent Bloomberg survey said that while most of the 35 economists expect the MPC to keep the repurchase rate unchanged at 6.5%, several predict a switch to a ‘neutral’ stance for the first time since June 2019 from its current hawkish view.
According to economists at HSBC Plc, a change in the RBI’s policy stance language would pave the way for a quarter-point rate cut in December.
“We believe the RBI doesn’t gain from waiting any longer,” Pranjul Bhandari and Aayushi Chaudhary wrote in a note. They expect another quarter-point reduction at the February meeting, taking the repurchase rate to 6%.
Madhavi Arora, Lead Economst at Emkay Global said, “While the upcoming policy may not see any rate action, a stance change to neutral with stress on being ‘actively disinflationary’ would be MPC’s best bet to prep ground for start of a shallow easing cycle, possibly from December.
Tricky for RBI to find a balance:
The fluidity of global narratives in conjunction with comfortable banking liquidity, easy domestic financial conditions on net, incipient weakness in growth, noisy food inflation, and the still-elusive 4% inflation target etc, would make it tricky for the RBI to find a balance in its policy biases, Madhavi said.
Meanwhile, the commencement of Fed’s cut cycle with a bumper 50bps cut has opened space for EMs, including RBI to start easing.
It is to be highlighted that the RBI Governor Shaktikanta Das has consistently highlighted that any move to adjust real interest rates hinges on food inflation stabilising near the target of 4%.
In July and August, the Consumer Price Index (CPI) fell below 4%. The average retail inflation from April to August stands at 4.3%, with food inflation still running above 5%.
Rate cut sometime in H2FY25
SBICAPS in its monthly EcoCapsule has also said the global developments sending commodity prices awry once again threaten to derail CPI’s hard-fought descent to 4%, adding to unpalatable food inflation which is already on the RBI’s plate.
Regardless, the markets may have already cut rates for themselves, helped by easing liquidity and slim G-sec borrowing calendar.
The new MPC will look to align policyspeak, with a change in stance perhaps preceding a rate cut sometime in H2FY25, while balancing inflation control, growth, and financial stability.
