RBI Policy: What are the expectations from first MPC meet after elections?

The Reserve Bank of India (RBI) is set to unveil the decision of its Monetary Policy Committee (MPC) on Friday against the backdrop of mounting apprehensions about an economic slowdown.

Following the outcome of the Lok Sabha Elections, concerns have escalated over a potential deceleration in fiscal consolidation coupled with amplified welfare spending.

Moody's Investors Service noted that although prospects for fiscal consolidation remain intact, the pace of debt reduction could moderate in light of the 2024 Lok Sabha election results.

Commencing its three-day meeting on Wednesday, June 5, the RBI MPC is slated to disclose its verdict on Friday, June 7.

Also Read: MPC meeting: How has inflation behaved since RBI hiked repo rate last year

SBI Research predicts the likelihood of the first rate cut in Q3FY25

In a research analysis, SBI suggested that the RBI's initial rate reduction is anticipated in Q3FY25, with the ensuing rate cut cycle expected to be modest in scale, aimed at bolstering liquidity.

Moreover, it advocated for the continuation of a stance geared towards the withdrawal of accommodation in the upcoming MPC sessions.

"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 per cent till May and decline thereafter to 3 per cent in July," it said.

"Inflation is expected to stay below 5 per cent beginning October till the end of FY25. For FY25, CPI inflation is likely to average 4.5 per cent versus 5.4 per cent in FY24," SBI Research added.

ICRA forecasts the status quo on 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 per cent," she added.

Union Mutual Fund

Union Mutual Fund anticipates the MPC to maintain the policy rate at 6.5 per cent while expecting a shift in stance to 'withdrawal of accommodation.'

Parijat Agrawal, Head of Fixed Income at Union Mutual Fund, said, "We expect the MPC to keep the policy rate unchanged at 6.5 per cent. We expect MPC to maintain its 'Withdrawal of Accommodation' stance. The system liquidity is expected to ease after the formation of the 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 per cent on a durable basis and is also contingent on the US FOMC decision. Fiscal consolidation, upgrade of S&P's India sovereign rating outlook to positive, inclusion of India in the JPM bond index from this June, is positive for the bond markets," Agrawal added.

 

Nuvama Wealth Management

Nuvama Wealth Management anticipates the maintenance of policy rates while suggesting a shift in policy stance from 'withdrawal of accommodation' to 'neutral' in the June 7 policy review.

Strong GDP figures, CPI above target, and potential delays in the Fed's rate adjustments are expected to keep the RBI cautious. However, domestic consumption weaknesses, ongoing softening of core inflation, and accelerated fiscal consolidation could prompt the MPC to moderate its monetary stance to neutral, it said.

MPC deliberations and India's economic performance

In the first MPC meeting of FY25, the RBI opted to maintain the repo rate at 6.5 per cent, marking the seventh consecutive instance of rate stability, aligning with market expectations.

Fiscal Deficit

Government data for FY24 indicates India's fiscal deficit at 5.63 per cent of GDP, an improvement over the anticipated 5.8 per cent projected in the Union Budget. In absolute terms, the fiscal deficit amounted to Rs 16.53 trillion.

GDP growth

India's GDP growth rate for the quarter ending March 31, 2024, surged by 7.8 per cent, surpassing the RBI's estimate of 7 per cent. Provisional government data places the FY24 GDP growth at 8.2 per cent, compared to 7 per cent in FY23.

Inflation

April's Consumer Price Index (CPI) stood at 4.83 per cent (provisional) compared to April 2023. Rural and urban inflation rates stood at 5.43per cent and 4.11 per cent, respectively.