RBI Monetary Policy Committee likely to maintain status quo on rates again

Through 2023, the Reserve Bank of India has kept interest rates steady. With all eyes on bringing down retail inflation closer to 4 per cent and economic growth remaining strong, the repo rate, which is the rate at which the central bank lends money to commercial banks, was left unchanged for the last five monetary policy committee meetings at 6.50 per cent.

The general expectation is that with inflation coming down, global central banks, including RBI, will begin cutting interest rates sometime in 2024. But, that is for later. As the MPC meets again between February 6-8, don't expect any change to the policy rates or stance.
The CPI (consumer price index) inflation in December 2023 touched 5.69 per cent, which was a four-month high. The RBI is mandated to maintain CPI at 4 per cent, within a range of plus or minus 2 per cent. But, RBI Governor Shaktikanta Das has for some time now stressed that the inflation target is 4 per cent and not 2 per cent to 6 per cent.

On that count, taming inflation still remains a work in progress. Food inflation has particularly been a cause for concern, even as core inflation has cooled. Disruptions in the Red Sea, due to the attacks by Houthi group on commercial ships, also pose a concern for supply chains and global food prices.

Goldman Sachs expects inflation to be around 5.3 per cent in the January-March 2024 quarter even as core inflation has fallen below 4 per cent.

The RBI is also likely to retain its tight liquidity stance and remain "focused on withdrawal of accommodation."

"With Q1 calendar year 2024 headline inflation still above the RBI's target, we maintain our view that the RBI will keep the policy repo rate unchanged at 6.50 per cent at the February 8 policy meeting, continue with hawkish guidance and reiterate the 4 per cent inflation target," said Santanu Sengupta, chief India economist at Goldman Sachs.

In fact, he expects the Reserve Bank to keep the repo rate on hold until the July-September quarter this year.
On the economy front, growth is likely to have remained strong. India's GDP growth in 2023-24 is estimated at 7.3 per cent, according to the first advanced estimates released by the National Statistical Office. However, while industrial and services growth has remained strong, tepid consumption demand is a concern.

Consumption growth is estimated to decelerate from 7.5 per cent in 2022-23 to 4.4 per cent in 2023-24, according to Rajani Sinha, chief economist at CARE Ratings.

"This marks the slowest consumption growth in the past two decades, excluding the pandemic year of FY2021, when it contracted by 5.2 per cent. The significant deceleration in private consumption, a driver of over 50 per cent of the GDP, raises concern," she noted.

The agriculture sector is also expected to face headwinds, due to below-average rainfall, leading to a projected growth slowdown from 4 per cent in FY2023 to 1.8 per cent in FY2024.

"This not only impacts rural demand, but also gives rise to concerns about higher food inflation, contributing to elevated inflation expectations," noted Sinha.

She added that core inflation dipping below 4 per cent in December, the first time this has happened since the onset of the pandemic, should give reassurance to the central bank.

"Given the prevailing circumstances, the RBI will continue to support economic growth while maintaining a cautious stance on inflation. Consequently, we expect the MPC to keep the current policy rates unchanged," Sinha said.

Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, also expects the RBI to maintain a pause on interest rates. He noted that on the banking front, while deposit growth has picked up, it is still lagging sustained momentum in credit growth.

The Federal Reserve is also expected to start cutting interest rates this year, but strong US non-farm payroll data and wages also seem to have pushed back on market expectations for a quick pivot to rates, he pointed out.

While the first rate cuts could be on the table from June 2024, August looks "the best bet now," he said.