Interview: RBI may cut repo rate from June 2024, says StanChart’s Anubhuti Sahay

Anubhuti Sahay, head of South Asia Economic research, Standard Chartered Bank

The Reserve Bank of India (RBI) can cut its policy rate by 50 basis points (bps), taking the repo rate to 6 percent by June 2024, said Anubhuti Sahay, head of South Asia Economic research, Standard Chartered Bank, in an exclusive interview with Moneycontrol on October 9.

"We are headed for a period of prolonged pause and tighter financial conditions. We can expect the first repo rate cut to come from June 2024 and the rate cutting cycle in my view will be very shallow, just a total of 50 bps, taking the repo rate at 6 percent," said Sahay.

Sahay added that the central bank’s open market operation (OMO) interpretation is primarily to reduce volatility in the government bond market if that would have been driven by index-related inflow. Edited excerpts:

How long do you think RBI will put a hold on the repo rate?

We are headed for a period of prolonged pause and tighter financial conditions. We can expect the first repo rate cut to come from June 2024 and the rate cutting cycle in my view will be very shallow, just a total of 50 bps, taking the repo rate at 6 percent. So it is still a year away. Even when it starts, it will be a very shallow rate cutting cycle to ensure that real rates are in positive territory. And Indian rates are not significantly lower than global ones.

Will the OMO sales announcement by the RBI pose pressure on the bond yield and will it keep bond yields elevated?

We have already seen a sell-off in the market, just on the back of a warning around OMO sales via the auction process. But of course, using a tool like OMO has taken them by surprise. Our interpretation is it is primarily to reduce volatility in the government bond market if it would have been driven by index-related inflow.

If the response of banks towards VRR (voluntary retention route) auctions improves, will the RBI go slow with OMO sales?

VRR primarily impacts your shorter end. When we talk about OMO sales, it is talking about the longer end. So, the point of impact is different when we are talking about these tools. I wouldn't say that there is a direct correlation with VRR. It's more about neutralising any undue reduction in government bond yields driven by expectations of higher flows due to index inclusion or, say, one month’s low inflation, especially as weather-related uncertainty continues to linger.

Do you think cutting cooking gas cylinder prices will balance out rising Brent crude oil prices?

On crude oil prices, our sense is the impact on inflation trajectory in the immediate term is limited because when crude oil prices were trading at $70 (per barrel), Indian retail prices were not reduced.

So to that extent, even a recent uptick in crude oil prices does not necessarily mean that we have to hike the rate immediately, especially when crude oil prices are so volatile. This means that seven days back it was above $90, closer to $95. Now it is $85. So there is a lot of volatility. As of now, we see limited risk. Also, we need to remain cognizant of the fiscal buffers we have in the form of excise duty.

How do you see inflation playing out considering the El Nino effect and rising prices of certain commodities?

As of now, our sense is inflation would move in the 5-5.5 percent range. Having said that, as the MPC (the RBI’s monetary policy committee) highlighted, it becomes extremely important to remain watchful of upside surprises in food prices.

Even though the monsoon is now over, reservoir levels are low. And that increases the sensitivity of total crop output to any weather disruption. We'll also have to see the implications of low reservoir levels on the winter crop. So while our inflation outlook as of now is pretty much in line with the MPC's projection at manageable levels, we are extremely wary of the upside, primarily from the food space, amid the higher global crude oil prices and global rates.