The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) convened for a three-day meeting, marking the first policy decision of the calendar year 2024 and the final one of the financial year 2024. Expectations are rife that the committee will opt to maintain the repo rate at its current level of 6.5 percent, a decision anticipated to persist for the sixth consecutive time. This steadfast stance aims to bolster efforts towards achieving a consumer price-based inflation (CPI) target of 4 percent, aligning with the overarching monetary policy objectives.
Potential Monetary Policy Adjustment
Industry speculations suggest that while the MPC may opt to retain the repo rate at 6.5 percent, there is a likelihood of a shift in its monetary stance from ‘withdrawal of accommodation’ to ‘neutral’. This adjustment reflects a discernible softening in domestic economic momentum, coupled with rapid fiscal tightening. However, it is unlikely that discussions or guidance on the path and timing of rate cuts will transpire at this juncture. Despite signs of easing, the prospect of rate cuts remains distant, as headline CPI continues to hover at elevated levels, with the RBI’s commitment steadfast in curbing it to 4 percent.
Insights from Nuvama
According to Nuvama, multiple variables support this projection. For starters, the core CPI is currently below 4%, which is a comfortable level. Second, domestic private consumption and exports are sluggish, resulting in slower growth in business revenues. Finally, fiscal policy is expected to tighten rapidly in FY25, according to Union Budget estimates. Nuvama thinks that the RBI, like the US Federal Reserve, will soften its position once it concludes its tightening measures. However, it remains skeptical of the MPC’s haste to decrease rates, given India’s persistently high headline CPI and the Fed’s status quo. The brokerage emphasizes the relevance of the RBI’s remark on liquidity management, which will be widely watched for insights into the changing monetary policy.
Economic Growth Projections
Ajit Kabi, Research Analyst at LKP Securities, forecasts a robust economic growth trajectory, with the economy poised to expand at 7.3%. This growth is primarily attributed to a surge in investment growth, projected at 10.3%, and an anticipated industrial growth of 7.9% in FY24. However, concerns arise from sluggish consumption demand, which accounts for 50% of GDP, and challenges faced by the agriculture sector due to below-average rainfall. Despite these headwinds, real GDP numbers are expected to remain resilient, prompting expectations of an upward revision in the growth projection for FY24 by the RBI.
Inflationary Trends
Kabi highlights the persistent challenge of headline inflation, which stood at 5.7% in December, primarily driven by elevated food prices, particularly pulses, legumes, and spices. However, core inflation remains stable below 4%, offering some relief to policymakers. Nuvama’s report underscores the gradual easing of core CPI, indicating muted second-round effects of high food inflation, thereby alleviating concerns regarding headline CPI. This stabilization provides a degree of comfort to policymakers amidst inflationary pressures.
Liquidity Management Dynamics
The impending MPC meeting is expected to witness continued emphasis on liquidity management by the RBI, given the prevailing tight money market conditions where the call money rate exceeds the repo rate. CareEdge highlights a persistent liquidity deficit in the banking system, reaching over ₹3.5 trillion in January. Despite anticipated government spending aimed at alleviating liquidity constraints, overall liquidity conditions are expected to remain tight, influencing money market dynamics.
Domestic Demand Concerns
Nuvama observes a sluggish recovery in rural demand and a slowdown in high-frequency indicators such as CV sales, electricity generation, and fuel consumption. The Union Budget’s emphasis on fiscal consolidation further dampens prospects for domestic demand. Against this backdrop, the global monetary landscape, characterized by indications of the end of tightening cycles by major central banks, adds to the uncertainty surrounding domestic demand dynamics.
Fiscal Balance and External Environment
Kabi notes the government’s inclination towards narrowing the fiscal deficit target, signaling a shift away from populist spending in preparation for the forthcoming general election. CareEdge highlights favourable external conditions, including narrowing trade deficits and robust foreign exchange reserves. Projections suggest a modest overall current account deficit for FY24, with anticipated factors such as India’s inclusion in bond indices and sustained FPI flows further bolstering the external outlook.
In summary, the RBI’s policy deliberations will be closely monitored against the backdrop of these key trends, with implications for economic growth, inflation dynamics, liquidity management, domestic demand, fiscal balance, and the external environment.
In conclusion, the economic outlook appears robust, buoyed by stable core inflation and wholesale inflation. With the anticipation of Rabi harvests, headline inflation is expected to stabilize in the forthcoming periods, contributing to overall economic stability.
RBI’s Stance and Policy Expectations
Given the prevailing tightening liquidity conditions, the RBI is poised to adopt a cautious stance on inflation while supporting economic growth. As a result, it is anticipated that the policy rate will remain unchanged, with a potential shift in stance towards NEUTRAL. Furthermore, measures to enhance liquidity conditions may be implemented by the RBI. Analysts, such as Kabi, foresee the possibility of a policy rate cut by June 2024, reflecting the central bank’s proactive approach to sustaining economic momentum.