Rate cut unlikely till Sept, but RBI may change policy stance by June

Repo rate cut unlikely till September 2024

The Monetary Policy Committee decision to keep the policy rate  unchanged seems to be apt, given the global and domestic economic outlook. The governor of the Reserve Bank of India stated that its monetary policy is in the midst of lingering uncertainties, and has to remain vigilant to ensure that it successfully navigate the last mile of disinflation. Even though some sections of the market were expecting a stance change to 'neutral', the MPC decided to continue with its 'withdrawal of accommodation' stance.

The rate-setting panel met shortly after the government emphasised on fiscal consolidation and infrastructure spending in the interim budget. The MPC voted with a five-to-one majority to keep the repo rate unchanged at 6.5 percent for the sixth straight time and remain focused on 'withdrawal of accommodation' as uncertainties in food inflation and on geopolitical front continue to linger.

One of the MPC members, Professor Jayanth Varma voted to reduce the policy repo rate by 25 basis points (bps) and change in stance to neutral. The transmission of the cumulative 250 bps policy rate hike (since May 2022) into the economy is still underway, according to the RBI.

On global front, though the probability of a soft landing has increased with incoming strong data, global macroeconomic outlook remains uncertain with geopolitical disruptions from various fronts like the Russia-Ukraine war, Israel-Hamas conflict and the Red Sea crisis, weak global trade momentum, volatile financial markets, and unsustainable level of public debt with the global debt to GDP ratio projected to reach 100 percent by the end of this decade.

Also read: BAT may exit ITC hotels business post demerger: CEO Tadeu Marroco

Related stories

Abhishek Bisen

Head - Fixed Income|Kotak Mahindra Asset Management Company

• 
  RBI MPC on October 1: Will RBI wait for tariff situation to resolve before acting on policy?
• 
  RBI likely to play it like a Test match: Repo rate cut unlikely in August policy meeting
• 
  Eye on RBI MPC: A 25 bps rate cut on cards as inflation eases, growth support seen intact

At the same time, the MPC was positive on the domestic growth outlook. The Indian economy has remained resilient and shown momentum amid various shocks. The Indian economy is cruising along with first advance estimates (FAE) placing the real GDP growth at 7.3 percent for FY24, fuelled by development of physical and digital infra, ease of doing business, enhanced labour force participation and improved quality of fiscal spending.

Forward-looking growth conditions are also positive and real GDP for FY25 is projected at 7 percent as per the RBI on the back of improvement in agriculture activity with increase in Rabi sowing, uptick in industrial activity with improving performance of manufacturing, resilient services sector activity, rural demand gathering pace, improved business sentiment, increasing capacity utilisation, support from government capex and policy support from production linked incentive (PLI).

Also read: Centre’s white paper lists how Modi govt ‘rescued economy from state of crisis’

Even though, headline Consumer Price Index (CPI) inflation moderated to an average of 5.5 percent during April-December 2023 from 6.7 percent during FY22, volatility in food prices is still a concern. Even as RBI draws comfort from core inflation remaining in check, it has highlighted uncertainty in the outlook on food inflation. Moreover, global shipping disruptions (avoiding the Suez Canal) are impacting supply chains, leading to volatility in prices of key commodities, especially crude oil. Assuming a normal monsoon, FY25 inflation is seen at 4.5 percent with risks evenly balanced.

The RBI governor also provided explanation on stance of withdrawal of accommodation and liquidity conditions. As per the RBI commentary, stance gives the future course of action which should be seen in the context of incomplete transmission and anchoring inflation to the target of 4 percent on durable basis.

On liquidity conditions, RBI to remain nimble-footed and flexible by way of both repo and reverse repo (VRR and VRRR) operations depending upon evolving liquidity conditions. The RBI also highlighted that liquidity conditions are being driven by exogenous factors and market operations are likely to resolve the same in the foreseeable future.

The bottomline is that the Indian economy is doing well, but inflation risks from food, fuel, and global shipping haven't disappeared. RBI Governor insisted that monetary policy must continue to be actively disinflationary to align to 4 percent target. We expect a change in stance in Q1FY25 and 50 bps rate cut in later part of FY25.

The RBI has shown comfort on long term rates and term spreads seem to augur well for duration play. The 10-year and below G-sec yields remain flat on day-to- day basis, while long term curve eased by a basis point. We recommend investors to stay invested and increase the duration as per their risk appetite.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.