Best for RBI to save the bullet on rate action, says ANZ Research's Dhiraj Nim

Dhiraj Nim Economist and FX Strategist at ANZ Researchh

The Reserve Bank of India's (RBI) monetary policy committee should hold off on rate action to evaluate the effects of GST cuts and tariffs on growth and prices, Dhiraj Nim, an economist at ANZ Research, told Moneyconntrol in an interview on September 29, the day MPC begins its bi-monthly policy review.

It is "best to save the bullet for now" and watch for the impact of the new goods and services cuts to play out, Nim said.

A Moneycontrol's poll of economist, fund managers, and treasury heads expects MPC to hold the rates when it shares the outcome on October 1.

Erratic rainfall, which has damaged crop in some states, remains a worry but is unlikely to have a bearing on MPC’s decision, Nim said. Here are the edited excerpts of the interview:

Do you think after GST reforms and an improved Q1 GDP print, the MPC will revise GDP projections?

The RBI may or may not adjust the growth projections upwards. One can argue on both sides. A strong Q1 print has lent upside risk to their annual forecast, whereas fears of a slowdown on account of tariffs are yet to be realised. I expect the RBI to keep the growth forecast unchanged for now, citing risks.

Some states have had an erratic monsoon rains, causing damage to the kharif crop. Will it oush up food prices and inflation in the coming months?

So far, there has been not much impact on daily food prices to upset CPI trajectory materially and worry the MPC. However, a close watch on cereal prices is especially warranted. We are not too worried about it, given sufficient stocks to begin with and a very low current food inflation.

Do you think the MPC will take into account rain damage while drawing up CPI projections? Will there be some some changes to the forecast?

The RBI may lower its FY26 CPI projections citing the current lower-than-projected inflation run rate. There is also some disinflationary impact of the GST cuts, which will depend upon pass- through by producers but it will be a downside risk nevertheless.

Both these reasons also mean downside risks to FY27 projections, which were pegged quite high in the last meeting. We do not believe erratic rainfall will feature prominently in the RBI's forecast revisions.

Will the policy announce liquidity measures?

We do not currently expect any durable liquidity measures by the RBI in the upcoming meeting. The RBI will continue to highlight its readiness and nimbleness in managing banking liquidity at appropriate levels. While the central bank may not prefer the call rate closer to the SDF rate, now is also not the time to let rates harden unduly for the want of liquidity, especially since the long-tenor yields have already climbed, tightening financial conditions.

What are your expectations on rate action and which are the factors that will influence the decision?

We at ANZ Research expect the monetary policy committee to keep the repo rate unchanged in the upcoming meeting at 5.5 percent, maintaining its 'neutral' stance but talking a bit on the dovish side. It is clear that growth is running as per the RBI's forecast, while inflation is running at a softer rate, creating space for the MPC to maintain some dovish bias for the outlook. They may, however, want to wait and watch the impact of GST cuts and tariffs on growth and price indicators. It is best to save the bullet for now.

Are GST reforms enough to give consumption a boost?

It is a great step to durably reduce tax burden on household balance sheets and increase disposable incomes. It is also a progressive step as it reduces burden on the poor households more than on the rich households. So it deserves to be lauded for its structural and redistributive appeal. However, the positive impact on growth in the current cycle may get blunted by income and job insecurities, as well as high indebtedness due to the personal loan boom of the last few years. These idiosyncrasies will play out but thinking from a medium-term perspective, it is certainly a positive for consumption.

What are the reasons that the urban demand is not to picking up?

Like I mentioned, a bit of household debt overhang, increased debt-servicing burden alongside economic uncertainty due to tariffs, especially among a large workforce employed in the affected sectors such as textiles, could be playing truant. Its not that urban demand is weak but it is not growing at a rate that will drive growth.