The Reserve Bank of India's monetary policy committee is set to meet between April 3 and 5 in what will be the MPC's first bi-monthly meeting of the new financial year. After raising the repo rate from 4 per cent to 6.5 per cent to tame a post Covid-19 surge in inflation, the central bank has left the benchmark rate at which it lends money to commercial banks on hold for the past six consecutive meetings and it is likely to remain so in the upcoming meeting as well.
The latest RBI MPC meet comes in the backdrop of strong GDP growth; the economy grew 8.4 per cent in the October-December quarter. But on the inflation front there are mixed signals. In February 2024, the consumer price index (CPI)-based inflation came in at 5.09 per cent, little changed from the 5.1 per cent print in January, but still above the central bank's 4 per cent target. What should comfort RBI is that core inflation (excluding food and energy) has eased to 3.5 per cent. However, food inflation remains elevated; it came in at 8.66 per cent in February.
In this backdrop, RBI could continue to wait and watch on how things pan out over the coming months. After below-normal rains in 2023, the upcoming monsoon season will be closely watched. So far the expectation is that El Nino conditions are likely to weaken and that should mean good rains than last year. A good monsoon season will be crucial for agriculture and in turn the rural economy, where demand has been slow for some time now.
Santanu Sengupta, Chief India Economist at Goldman Sachs, feels RBI will take comfort from declining core inflation, slightly soften its hawkish forward guidance, but remain cautious given risks to food inflation from weather shocks.
"With headline inflation still above the RBI’s target, we maintain our view that the RBI will keep the policy repo rate unchanged at 6.5 per cent at the April 5 policy meeting, sound optimistic on growth, acknowledge January-February average core inflation at 3.5 per cent, but continue to reiterate the commitment to the 4 per cent headline inflation target," he said.
According to Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, CPI inflation is expected to have remained slightly above 5 per cent in March. It is then expected to decline till July, rise again to 5.4 per cent in September, followed by a deceleration. Over the current 2024-25 financial year, Ghosh expects CPI to average 4.5 per cent.
What also will be keenly watched by the RBI is the path that the US Federal Reserve takes on rates. The US central bank is widely expected to cut the Fed Funds Rate at least three times in 2024. But, an unexpected rise in US inflation in February has dashed hopes of early rate cuts.
Ghosh believes the RBI will cut interest rates only in the October-December quarter of the current financial year and as such the rate cut cycle is likely to be shallow.
Goldman's Sengupta expects the RBI will cut the repo rate once by 25 basis points in the September quarter and once again by 25 bps in the December quarter.
Deepak Agrawal, chief investment officer - debt, Kotak Mahindra AMC, also sees RBI keeping interest rates unchanged this time around, while also maintaining the "withdrawal of accommodation" policy stance.
"Strong growth in FY2024 and strong growth projections for FY2025, gives leeway to RBI to wait for actual monetary easing in advanced economies," he said.
However, with one year forward real rates upwards of 2 per cent, based on FY2025 inflation forecast, there is a case to change the monetary policy stance to “neutral”, since the stealth tightening undertaken by actively managing liquidity in the system from the second quarter of 2023-24 being undone, Agrawal feels.
Rajani Sinha, chief economist at Care Ratings, also expects the RBI to maintain a status quo on both interest rates and the policy stance in the upcoming MPC meet.
"We expect the RBI to opt for a shallow rate cut cycle of 50 bps starting third quarter (October-December) of FY2025," she said.
Care expects inflation to average 4.8 per cent in the current financial year, compared with a projected 5.4 per cent last fiscal.
