By Ritu Singh
August 7, 2024, 3:35:11 PM IST (Published)
6 Min ReadThe Reserve Bank of India’s (RBI's) monetary policy committee (MPC) is expected to hold fire on both rates and stance in the upcoming policy on Thursday (August 8) as food inflation reigns at a six-month high and steady growth provides comfort to stay the course, a poll conducted by CNBC-TV18 across ten economists shows.
All the respondents to the poll expect the MPC to leave repo rates unchanged at 6.5%, and the stance as "withdrawal of accommodation", possibly with a 4:2 vote in favour of the move.
“We think the MPC will remain on a cautious hold in the upcoming meeting, with a likely vote of 4-2 in favour of maintaining the repo rate at 6.5%. We expect the monetary policy stance to be unchanged at “withdrawal of accommodation,” in line with the rate decision,” Barclays said in a note.
In the note, Barclays noted that inflation breaching the 5% mark in June and persistent pressure on the headline rate from elevated food prices would likely drive the decision to maintain the status quo.
Growth indicators still indicate no material loss of momentum, which should allow the central bank to focus on bringing inflation down towards its 4% target.
The two dissenting voices will likely again come from the external MPC members (Jayanth Verma and Ashima Goyal), who voted for a cut in the repo rate in the June MPC, it said.
“The Reserve Bank of India’s Monetary Policy Committee (MPC) is likely to hold the repo rate steady for the 8th consecutive meeting in July 2024. The stance of the monetary policy is also expected to be retained at ‘withdrawal of accommodation’. Incidentally, the stance of the monetary policy was last changed in Jun 2022. This is because RBI is unlikely to be comfortable with the elevated levels of food inflation in recent months. On the other hand, domestic growth impulse has been strong giving RBI the room to keep rates at current levels until it has sufficient confidence that inflationary pressures have subsided on a durable basis,” Aditi Gupta, Chief Economist at Bank of Baroda.
While the recent events around the miss on US jobs data and resultant growing expectations of a rate cut by the US Federal Reserve in September will likely weigh on the minds of the MPC members, as the Reserve Bank Governor Shaktikanta Das insists, it is domestic cues that will guide the central bank’s policy actions.
“We have already seen Bank of Japan (BoJ) hiking rates, resulting in yen carry trade concerns. Bank of England has already cut rates. RBI has been stressing on meeting a consumer price index (CPI) of 4% for them to change their stance on rates. From a transmission perspective, India is already seeing more tightening happening (though we agree that some of this is a lag effect). The interesting part is that currency has been very steady in a narrow range for the past 7 months and as per our discussions with some bank treasury heads, the RBI could endeavour to maintain this. Hence, RBI cannot completely ignore if the US Federal Reserve cuts rates by 100 basis points (bps) in 2HCY24,” Macquarie said in a note.
Half the respondents to the poll said that the RBI may only change its stance from the current ‘withdrawal of accommodation’ only by the October, with a third expecting the pivot only by December and others by February next year.
The window for the first rate cut, however, may only open by December, as per the CNBC-TV18 poll, but respondents added that the balance of risks is tilted to a cut even later.
Six out of ten respondents said they expect the total quantum of rate cuts in this cycle to be around 50 bps, with a third expecting a 75 bps cut in total.
“Liquidity conditions have eased significantly with the average system liquidity in surplus in July 2024. RBI is likely to manage the evolving liquidity situation through its fine-tuning operations including scaling up its VRRR auctions,” added Aditi Gupta, Chief Economist at Bank of Baroda.
“With returns on bank deposits taxable and treatment (bank deposits are taxed at accruals compared to competing asset classes being taxed at redemption) being completely non-uniform as compared to asset classes… the war for deposits could be prolonged. We could thus witness a paradox of higher deposit rates even when rate cuts start to happen. This could significantly impede policy transmission… RBI needs to innovate on liquidity management…time now to make CRR a countercyclical policy tool,” Soumya Kanti Ghosh, Chief Economist at State Bank of India (SBI) said in a pre-policy note.
All ten economists polled by CNBC-TV18 said that the Reserve Bank may leave the CPI forecast unchanged in this policy, at an average of 4.5% for the year, despite risks from high food inflation, which has averaged 8% over the last 12 months.
“India's retail inflation increased to 5.08% in June 2024, compared to 4.80% in May, owing to higher food and beverage inflation. Core CPI increased to 3.13% compared to 3.07% in May. Both rural and urban inflation increased in June. While rural inflation increased to 5.66%, urban inflation rose to 4.39% in June 2024. CPI inflation is expected to remain below or close to 5.0% in the remaining months, except for September 2024 and October 2024. For the whole FY25, CPI inflation is likely to average to 4.6%-4.7%,” SBI said in a research note.
“We also expect the MPC to maintain its inflation forecast at 4.5% for FY24-25 (Barclays: 4.3%), but to flag spatial variations in monsoon rains so far and the volatility in international oil prices (since the June MPC) as factors to monitor. Wholesale price inflation has also accelerated since the last MPC meeting, though again driven more by rising food prices than manufacturing costs. Upticks in both input and output price PMIs for July provide further cause for caution,” Barclays said.
Eight out of ten respondents to the poll also expect the MPC to maintain its gross domestic product (GDP) forecast for FY24-25 at 7.2%, with others expecting a marginal upward or downward revision to the number.
“We expect the RBI to retain its growth projection of 7.2% for FY25. However, our GDP growth projection for FY25 is marginally lower at 7% (broadly in line with the Economic Survey’s projection of 6.5-7%). High-frequency indicators like PMI, tractor sales, e-way bill collections, toll collections and Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) job demand show sustained economic momentum. Purchasing Managers' Index (PMI) numbers of both manufacturing and services continue to remain in the expansionary zone. E-way bills and toll collections grew by 16.3% and 37.4% YoY respectively in June,” CareEdge said in a note.
Industry and market participants will also watch out for the RBI’s comments specifically on the recently proposed draft liquidity coverage ratio (LCR) guidelines, project financing rules, as well as the widening credit deposit ratio and scramble for deposits in general.
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