In the upcoming RBI policy meeting on April 5, the central bank is expected to keep its policy rate unchanged at 6.5 percent, synchronising with the policy action of major central banks. The RBI is likely to focus more on bringing down inflation to the 4 percent target after concerns over economic growth abated with the GDP growth coming in at 8.4 percent in Q3FY24. The recent rise in crude oil prices and weakening rupee could also weigh on their mind.
Given that inflation is still in the 5 percent range, there is the possibility of future shocks on food inflation, especially due to heatwaves expected in the summer months. Therefore, the MPC is expected to maintain a status quo on rate this time. Since growth in FY24 has been better-than-expected, the central bank will have less concerns there and will continue to focus on taming inflation.
Also read: RBI Monetary Policy: Here are 5 key things to look for tomorrow
However, the probability of a change in stance to 'neutral' in the upcoming policy may be dialled up.
Markets eyeing RBI's change in stance for future rate cuts
In the previous policy, the RBI had signalled the need to keep monetary conditions tight to improve transmission. Since January 2024, liquidity conditions on an average have improved. This is on the back of higher government spending and greater liquidity support from the RBI (VRR auctions). As a result, it led to a moderation in overnight rate which has started remaining closer to or below the repo rate (6.5 percent) – effectively working as a rate cut at the very short-end of the curve. This could be read as an early signal of the RBI’s comfort with gradually moving towards a more 'neutral' stance on monetary policy.
Admittedly, the timing of change in stance remains a close call between April or June policy. A change in stance during April could be a precursor to a probable change in policy rates during June or August, in tandem with the policy communication from major central banks like the Fed, BoE and ECB.
Also read: India's 'Goldilocks' economy to prompt RBI to keep rates on hold
The repo rate is unlikely to be changed before the August 2024 MPC review (the June 6-8 meet is too close to the counting of votes on June 4 and swearing-in of the new Cabinet).
The RBI may wait till there is visibility on monsoon turnout, sustenance of growth momentum, and the US Federal Reserve’s rate outcome. The likely shift from El Niño to La Niña - weather patterns can influence rainfall in India - may also support food prices in the later part of 2024.
Overall, the RBI policy due on April 5 is unlikely to materially impact the equity market, given the current market mood's resilience and lack of any major expectations.
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