 "Monetary policy: RBI dashes early rate-cut hopes, maintains status quo")
The Reserve Bank of India’s (RBI’s) six-member monetary policy committee on Thursday decided to maintain the status quo on the policy repo while retaining an accommodative stance — with a 5-1 majority on both resolutions.
Interestingly, it was for the first time a member, Jayanth Varma, voted in favour of a rate cut in this cycle — by 25 basis points (bps). External member Varma also voted to change the stance to neutral.
“The uncertainties in food prices, however, continue to impinge on the headline inflation trajectory,” RBI Governor Shaktikanta Das said.
“Inflation has seen a significant moderation from the highs of the summer of 2022 … That said, the job is not yet finished, and we need to be vigilant about new supply shocks that may undo the progress made so far,” Das said, adding that the central bank needed to ensure successful navigation of the last mile of disinflation. “Stable and low inflation at 4 per cent will provide the necessary bedrock for sustainable economic growth.”
The RBI, which for the first time announced its growth projection for next financial year, pegged real gross domestic product (GDP) growth at 7 per cent. Inflation for FY25 was projected at 4.5 per cent. While CPI (consumer price index) inflation is expected to be at 5 per cent in Q1FY25, it will fall to 4 per cent in Q2. This has pushed back expectations for a reduction in the repo rate to the second quarter of FY25.
After hiking the repo rate by 250 bps to 6.5 per cent between May 2022 and February 2023, the RBI paused in April last year. This is the sixth consecutive meeting when the status quo is maintained.
During the post-policy media interaction, Deputy Governor Swaminathan J said the transmission was incomplete where lending rates were linked to the marginal cost of fund-based lending rate (MCLR).
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“The rates on the deposit side reset much faster and they are passed on pretty much faster as we have seen that deposit rates have almost played out. While on the lending side, rates take much more time to pass,” Swaminathan said.
Markets were disappointed with the hawkish tone as the BSE Sensex ended 1 per cent or 723.57 points down, and the 10-year benchmark yield erased early gains after the policy announcement.
“Against our expectations, we think the tone of the statements from the governor and the MPC maintained the level of hawkishness from the December meeting,” Rahul Bajoria, managing director and head of EM Asia (ex-China) economics, Barclays.
“The focus remained on navigating the last mile of disinflation, which in the governor’s view is the ‘most challenging’,” Bajoria said, adding that the governor’s confidence on growth and projections for the same, suggest the MPC, for now, sees little need for monetary policy easing to support growth.
Abheek Barua, chief economist, HDFC Bank, said the RBI left little room for any imminent policy pivot and, therefore, “we do not expect rate cuts to happen before the August 2024 policy”.
“Watchful of risks of delayed start of rate cut cycle to beyond June 24,” said Morgan Stanley in a note to its clients. “…the moderation in inflation opens up room for a shallow rate cut cycle (cumulative 50 bps), as we have in our base case starting from June 24. However, we are watchful of risks of a delayed start to the rate cut cycle, from a stronger-than-anticipated growth trend, slower moderation in inflation,” the note said.
While the market was also disappointed by the lack of new measures to address liquidity issues, the central bank announced a 14-day variable rate repo auction for a notified amount of Rs 1.75 trillion.
“The focus of liquidity management remains to align the weighted average call rate with the repo rate,” said a report from IDFC First Bank.
“System liquidity deficit is expected to ease by the end of March 2024, as government expenditure picks-up. Hence, by April we expect the overnight rates to move towards the repo rate, on a consistent basis,” the report said.