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The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is expected to maintain a status quo for the eighth consecutive policy review, by keeping both the policy repo rate and stance unchanged, all the 10 respondents said in a Business Standard poll.
The RBI will announce the policy review on June 7.
After increasing the repo rate by 250 basis points (bps) to 6.5 per cent between May 2022 and February 2023, the rate-setting panel kept the rate unchanged in all the previous seven policy review meetings.
“While headline inflation seems moderate, the food inflation outlook remains uncertain. With growth momentum positive, a cautious pause at this policy is expected,” Achala P Jethmalani, economist at RBL Bank.
India’s gross domestic product (GDP) witnessed a 7.8 per cent year-on-year growth in the January-March quarter and 8.2 per cent in 2023-24 (FY24), exceeding expectations. This growth was driven primarily by a significant expansion in the manufacturing sector. Economists say this positive momentum will continue throughout the year.
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The headline inflation remains in the RBI’s tolerance band, which is set at 2 to 6 per cent. The inflation slightly moderated to 4.83 per cent in April, from the previous month’s 4.85 per cent due to the statistical effect of a higher base.
All respondents were unanimous in saying that the RBI will continue with the ‘withdrawal of accommodation’ stance.
Aditi Nayar, chief economist, ICRA, said 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 MPC.
“Moreover, the higher-than-forecast growth in GDP in Q4 FY24 has dimmed the likelihood of a stance change in August 2024 as well,” said Nayar.
A number of the respondents expect the RBI to start cutting rates in the last quarter of FY25.
“We expect rate cuts to be quite back-ended in Q3-Q4 FY25, unless food prices moderate through the next few months and higher global commodity prices do not transmit to core inflation,” said Nayar.
State Bank of India, Bank of Baroda, and YES Bank see the first rate cut in the October-December quarter of FY25.
Interbank liquidity conditions are expected to improve after the final Budget is presented in July, with anticipated increases in government expenditure. Until then, the RBI is likely to continue using temporary measures, such as variable rate repos (VRRs), to infuse liquidity.
In May, the interbank liquidity deficit averaged Rs 1.4 trillion, exacerbated by moderate government expenditure due to the Interim Budget. Despite strong tax collections leading to a higher government cash surplus and tight interbank liquidity, the weighted average call rate remained near the repo rate, averaging 6.56 per cent in May 2024, due to RBI’s liquidity infusions via VRRs.
“Interbank liquidity conditions are expected to improve post the final Budget is presented in July, with government expenditure expected to pick up,” said Gaura Sen Gupta, chief economist at IDFC First Bank.
Sen Gupta said the government cash surplus was substantial at Rs 5 trillion as on May 24, post the RBI dividend. “The Centre has been utilising its cash surplus to reduce the drain on interbank liquidity via cutting T-bill auctions in Q1 FY25 and G-sec buybacks,” Sen Gupta said.
Another factor expected to ease liquidity pressures will be the pick-up in capital inflows in H2 FY25, with India’s inclusion into the JP Morgan EM Bond index.
Other capital inflows are also expected to pick up in H2 FY25, once the Fed rate cut cycle starts. Hence, the RBI is expected to stick to temporary liquidity infusion measures such as VRRs, Sen Gupta added.
