In the monetary policy committee (MPC) meetings in the recent past, Reserve Bank of India Governor Shaktikanta Das stressed on reigning in inflation at 4 per cent. Bringing inflation within the tolerance band (2 per cent to 6 per cent) is not enough, he had said.
As per the latest print released by the Ministry of Statistics and Programme Implementation, retail inflation declined to a five-month low of 4.87 per cent in October. That should give a lot of comfort to the MPC. As such, inflation in the US is also cooling. In the 12 months through October, US consumer prices rose 3.2 per cent, versus 3.7 per cent in September, raising hope that the Federal Reserve was done raising interest rates and 2024 could see central banks generally reducing rates.
While inflation is declining, there are still many uncertainties on various fronts from vegetables to crude oil and geopolitics. At the same time, GDP growth has been strong. India's GDP grew 7.6 per cent in the July-September quarter, well ahead of around 6.8 per cent that most analysts had expected. Industrial output has also been strong.
In this backdrop, the MPC may want to remain cautious and therefore could leave its benchmark repo rate unchanged, while also retaining its stance of "withdrawal of accommodation." The RBI has kept the rate at which it lends money to commercial banks unchanged at 6.50 per cent since February 2023.
"Robust expansion of economic output in first half, led by upward surprise in Q2 GDP growth, underscores the economic resilience despite a below normal rainfall leading to lower projected kharif output. Additionally, moderation of inflationary prints closer to RBI's target will provide further comfort to the MPC in determining future course of action," says Rajani Sinha, chief economist at CARE Edge.
But, despite the overall economic resilience, there are pockets of challenges. For instance, rural demand remains lackluster and this was clearly evident from the less-than-encouraging sales of fast moving consumer goods companies in the past quarter. There has been an uptick in urban and rural demand in the festive season, but it is still uncertain whether this will be sustainable.
Sinha warns that firming up of certain food prices like onion, tomatoes, cereals, pulses and sugar could lead to a sequential uptick in headline inflation numbers in November and December. Lower reservoir levels could also affect agriculture production, and this could pose additional inflationary risk. All these factors will need to be closely watched.
Considering all this, the MPC will keep interest rates on hold, while it is expected to raise its previous GDP growth forecast by around 20-30 basis points, according to Sinha. There are no further rate hikes expected, but any possibility of a rate cut will only be after the June quarter of the next financial year, she added.
Aditi Nayar, chief economist at ICRA, also feels that with the GDP appreciably higher than MPC's past forecast and continuing concerns around food inflation, the MPC will pause this time too amid a "fairly hawkish tone of the policy document."
Madan Sabnavis, chief economist at Bank of Baroda echoed similar views.
"The RBI is most likely to maintain status quo on rates as well as stance this time. The high growth witnessed in Q2 in GDP will provide assurance that the economy is on track. The low core inflation numbers in the last few months will provide comfort that there is no need to increase rates even while headline inflation is likely to be volatile in the upward direction," said Sabnavis.
He also feels there could be a slight upward revision in the RBI's GDP forecast by around 10-20 basis points.
Pankaj Pathak, fund manager - fixed income at Quantum Mutual Fund, says the RBI can also take comfort from the sharp fall in core inflation (inflation barring food and energy), which is now getting closer to its 4 per cent target. Pathak also expects the MPC to maintain a status quo, but feels that given "the significant improvement in the macro picture, there is a case for the RBI to become less hawkish in its statement."
He also expects more clarity from RBI on its liquidity management strategy this time around.
"Despite banking system liquidity being in large deficit, the RBI is not conducting any variable rate repo operations. This in turn has pushed the banking system to borrow at a higher interest rate under marginal standing facility," noted Pathak.
Forward guidance on inflation, comments on behaviour of systemic liquidity going ahead as well as any explanation on not using the structural liquidity tools such as OMO (open market operation) sales as touched upon in the previous MPC meeting will be keenly watched by the market participants, said Mandar Pitale, head - treasury, SBM Bank of India.
