The Reserve Bank of India (RBI) Governor Shaktikanta Das unveiled the initial monetary policy of the financial year 2024-25. The Monetary Policy Committee (MPC) of the RBI, which sets interest rates, had a two-day review meeting that ended on April 5.
Key Policy Decisions
Repo Rate Unchanged: The RBI opted to maintain the key policy repo rate at 6.5% for the seventh consecutive time.
Policy Stance: The MPC, chaired by Governor Das, retained the policy stance at ‘withdrawal of accommodation’.
Economic Projections
GDP Growth Forecast: India’s real GDP growth rate for FY25 is projected at 7%. The quarterly breakdown includes Q1 at 7.1%, Q2 at 6.9%, Q3 at 7%, and Q4 at 7%.
CPI Inflation Forecast: CPI inflation for FY25 is estimated at 4.5%, with detailed quarterly projections: Q1 at 4.9%, Q2 at 3.8%, Q3 at 4.6%, and Q4 at 4.5%.
Non-Policy Measures
Trading of Sovereign Green Bonds: A scheme for trading sovereign green bonds at IFSC will be introduced.
Access to Retail Direct Scheme: A mobile app will be launched for accessing RBI’s Retail Direct Scheme to participate in the GSec market.
LCR Framework for Banks: A draft circular for the Liquidity Coverage Ratio (LCR) framework for banks will be issued shortly.
Rupee Interest Rate Derivatives: All small finance banks will be permitted to deal in rupee interest rate derivative products.
UPI Facilities: Enabling UPI for Cash Deposit Facility and granting UPI access for Prepaid Payment Instruments (PPIs) through third-party applications.
Distribution of CBDCs: Central Bank Digital Currencies (CBDCs) will be distributed through Non-bank Payment System Operators.
Optimistic Outlook on Rate Cuts
George Muthoot, MD, Muthoot Finance
Current Assessment: While the RBI remains watchful of inflation, we foresee potential rate cuts in the first half of fiscal 2024-25.
Encouraging Factors: The global economy’s resilience, India’s sustained economic growth, and stable rupee support our positive outlook.
Economic Indicators: Increasing investment activity and robust rural demand signal promising prospects for gold, vehicle, and home loans.
Possibility of Rate Cuts in the Third Quarter
Parijat Agrawal, Union Mutual Fund’s Head of Fixed Income
Anticipated Scenario: We project rate cuts in the third quarter of FY25, possibly following a rate cut cycle by the US FOMC.
RBI’s Approach: The RBI is likely to maintain neutral liquidity to ensure the effective transmission of higher rates.
Potential Modifications: Any changes to the LCR framework could benefit bonds.
Market Insights and Rate Cut Expectations
Vikas Garg, Invesco Mutual Fund’s Head of Fixed Income
Interpretation of Comments: Despite concerns over crude prices and food inflation, remarks suggesting a dovish stance on inflation prevail.
Market Dynamics: Fundamentals such as the FY25 GDP forecast at 7% and manageable CAD support expectations of rate cuts in the latter half of 2024.
Government Initiatives: Favorable fiscal demand-supply dynamics, rapid fiscal consolidation, and robust FPI inflows contribute to the optimistic outlook.
Forecasting a Shallow Rate-Cut Cycle
Vikram Chhabra, Senior Economist, 360 ONE Asset:
Current Analysis: Private consumption growth slowdown and low core CPI indicate a need for policy stance adjustment to neutral.
Cautionary Approach: Despite potential rate cuts, RBI may remain cautious due to uncertainties surrounding food inflation.
Monsoon Impact: The trajectory of rate cuts depends significantly on the monsoon season’s performance.
Sanjay Agarwal, Founder, MD & CEO, AU Small Finance Bank:
- RBI’s Prudence: Maintaining the repo rate and ‘withdrawal of accommodation’ policy stance amidst geopolitical uncertainties and potential climate impacts is a wise move.
- Potential for Easing: If inflation follows the predicted path downward, there might be room for monetary easing in the future.
- Welcome Flexibility: Allowing Small Finance Banks (SFBs) to manage interest rate risk using permissible derivatives is a positive development.
Optimistic Outlook
Nilesh Shah, MD, Kotak Mahindra AMC
- Comparing to Brian Lara: Drawing parallels with Brian Lara’s record-breaking innings, Governor Das has steered the RBI towards stability, trust, and growth.
- Market Confidence: Financial markets remain stable with trust in the RBI’s ability to bring inflation to the desired level while surpassing growth expectations.
- Future Expectations: Expectations are high for the RBI to continue prioritizing stability, trust, and growth in the market.
Market Sentiment Amid RBI Announcement
Governor Das’s positive outlook on domestic growth and inflation did not lift market sentiment. Equity benchmarks Sensex and Nifty 50 saw a slight decline following the RBI’s decision to maintain the repo rate and policy stance.
RBI’s Cautious Approach
Sujan Hajra is the executive director and chief economist of Anand Rathi Shares & Stock Brokers
- Anticipation of Rate Cuts: Despite expectations for rate cuts by the end of 2024, the RBI appears inclined towards a cautious approach, refraining from initiating a rate cut cycle immediately.
- Neutral Policy Stance: The current neutral stance of the central bank aims to manage risks without causing undue disruption to debt and equity markets.
- Balancing Growth and Inflation: This strategy underscores the RBI’s commitment to balancing economic growth while keeping inflation in check, recognizing the influence of volatile food prices and global oil fluctuations.
Focus on Fintech Sector Regulation
RBI Deputy Governor T. Rabi Sankar:
The RBI is evaluating feedback on Self-Regulatory Organisations (SROs) for the Fintech sector and plans to introduce a regulatory framework soon.
Supervision of Financial Institutions
Governor Shaktikanta Das:
- Supervisory Mechanism: The RBI’s supervision mechanism ensures regular oversight of banks and Non-Banking Financial Companies (NBFCs).
- Correction of Deviations: When significant regulatory deviations are identified, the RBI engages with the entities concerned and directs corrective actions, reserving supervisory restrictions for extreme cases.
- Systemic Stability: There are no systemic issues warranting widespread concern, as corrective measures are applied only in isolated cases.
Bi-Monthly Committee Meeting Insights
Reserve Bank of India (RBI):
- Real GDP Growth Forecast: The RBI maintained the real GDP growth forecast for the fiscal year 2024-25 at 7% during its first bi-monthly committee meeting.
- Quarterly Growth Projections: Adjustments were made to the growth targets for specific quarters, reflecting nuanced changes in economic outlooks and forecasts.