The RBI is set to announce the decision of its Monetary Policy Committee (MPC) on Friday amid the raising concerns of economic slow down.
Since the Lok Sabha Elections gave the outcome on a flip-side, concerns are high on potentially slower pace of fiscal consolidation alongside increased welfare spending.
Moody’s ratings said though fiscal consolidation prospects remain intact, the pace of debt reduction could slow in the wake of the election results.
RBI MPC has begun its three-day meeting on Wednesday, June 5, and the decision is due on Friday, June 7.
SBI Research says first rate cut by likely in Q3FY25
In a research paper, SBI said that the first rate cut by RBI is expected in Q3 FY25, and that too such a rate cut cycle is likely to be shallow measures to augment liquidity.
It also said that the stance should continue to be withdrawal of accommodation in the upcoming MPC.
“The CPI inflation is expected to approach the RBI tolerance band in the financial year’s first half (H1FY25). CPI inflation is expected to remain close to 5% till May and decline thereafter to 3% in July.”
“Inflation is expected to stay below 5% beginning October till the end of FY25. For FY25, CPI inflation is likely to average 4.5% versus 5.4% in FY24,” said SBI Research.
ICRA predicts status quo on the rates and stance
“The recent inflation data and the outlook for prices of food and commodities had suggested a status quo on the rates and stance in the upcoming June 2024 monetary policy review,” said Aditi Nayar, Chief Economist, Head of Research and Outreach at ICRA.
“This has been further cemented by the higher-than-forecast expansion in the Indian economy in Q4FY24, which led to the full-year GDP growth printing above 8%.
Union Mutual Fund
Parijat Agrawal, Head of Fixed Income at Union Mutual Fund said, “We expect the MPC to keep the policy rate unchanged at 6.5%. We expect MPC to maintain its ‘Withdrawal of Accommodation’ stance. The system liquidity is expected to ease after the formation of new government as the new government would resume spending.”
“The Headline CPI may remain sticky due to volatile food inflation. Any rate cut depends upon CPI moving towards 4% on a durable basis and is also contingent on US FOMC decision. Fiscal consolidation, upgrade of S&P’s Indian sovereign rating outlook to positive, inclusion of India in JPM bond index from this June, is positive for the bond markets,” he added.
Nuvama Wealth Management
The MPC may maintain the status quo on policy rates, but soften the policy stance from ‘withdrawal of accommodation’ to ‘neutral’ in the policy review on June 7.
Strong GDP numbers, headline CPI above target and seeming delay in the Fed’s rate cuts shall keep the RBI in hold mode. However, weak domestic consumption, consistently softening core inflation and faster-than-expected fiscal consolidation could move the MPC to soften its monetary stance to neutral, it said.
Highlights of previous MPCs and India’s performance
In the first MPC meet of FY25, the RBI decided to keep the repo rate unchanged at 6.5%. It was the seventh consecutive time the rate had been held steady, aligning with market expectations.
Fiscal Deficit:
According to the government data, for the Financial Year 2024, India’s fiscal deficit stood at 5.63% of the GDP, better than the expected 5.8% estimated in the Union Budget.
In actual terms, the fiscal deficit, or gap between expenditure and revenue, was at Rs 16.53 lakh crore.
GDP growth:
India’s GDP growth rate in the quarter ending March 31, 2024 grew by 7.8%, surpassing the RBI estimate of 7%.
As per the government data, the GDP growth provisionally stands at 8.2% for FY24, as compared to the growth rate of 7% in FY23.
Inflation:
For April, the government data said the Consumer Price Index (CPI) number stands at 4.83% (Provisional) over April, 2023.
The corresponding inflation rate for rural and urban is 5.43% and 4.11%, respectively.
