Expect no change in RBI stance, MPC repo rate today, says IDFC’s Gaura Sen Gupta

The next step will be policy rate cuts which are expected to start from June or August onwards

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) will maintain the status quo on its policy stance when it meets on February 8, said Gaura Sen Gupta, Economist, IDFC First Bank. “The key focal point for the RBI monetary policy will be whether the stance is retained, and its outlook on liquidity management. We expect the RBI to maintain the status quo on its stance in the February policy. We expect the stance to change to neutral in April,” Sen Gupta told Moneycontrol.

On the MPC’s decision on the repo rate, Sen Gupta said that the central bank will maintain the status quo on policy rates in the February policy.

Will the RBI MPC keep policy rates unchanged today? Follow our LIVE blog

She further highlighted that the core inflation is expected to remain contained with some moderation in growth momentum in FY25. Edited excerpts:

What will RBI’s MPC decision on repo rate be on February 8?

We expect a status quo on policy rates in the February policy. Further, we expect the RBI to start rate cuts from June or August 2024 onwards.

Do you see a change in stance of the RBI in the coming MPC meeting?

The key focal point for the RBI monetary policy will be whether the stance is retained and the outlook on liquidity management. RBI’s liquidity management indicates a shift in policy preference, from keeping overnight rates closer to MSF, towards keeping it between MSF and repo rate. RBI has been infusing liquidity via VRRs since mid-December to keep overnight rates below MSF. At the same time, it has also undertaken VRRRs to prevent overnight rates from falling below the repo rate.

However, it might be too soon to change the stance from a signalling perspective, as inflation remains above the 4 percent target. Therefore, we expect the RBI to maintain the status quo on its stance in the February policy. We expect the stance to change to neutral in April. That said, stance change will be a close call.

RBI policy: MPC may leave repo rate unchanged, say bankers

India's headline retail inflation rate accelerated to a four-month high of 5.69 percent in December. Implication for monetary policy?

The rise in inflation to 5.69 percent in December was primarily due to an adverse base effect. More importantly, third quarter FY24 inflation at 5.4 percent was lower than RBI’s estimate of 5.6 percent. MPC members are likely to draw comfort from broad-based moderation in core CPI inflation, spread across goods and services inflation.

The coexistence of subdued core inflation and strong growth conditions is likely due to growth being led by a capex cycle while private consumption growth has been softer than expected.

In the fourth quarter of FY24, headline CPI inflation is expected to average at 4.8 percent versus RBI’s estimate of 5.2 percent. Food inflation is showing some signs of easing in January 2024, with a winter decline in vegetables.

What are your thoughts on the current account deficit?

The current account deficit in FY24, is expected to reduce to 1.2 percent of GDP versus a 2 percent deficit in FY23, led by a reduction in the trade deficit as commodity prices eased and supply chains normalised.

Services surplus and transfers have risen, reflecting the strong growth of India’s services exports and strong growth conditions in the US. The current account reflects the gap between savings and investments in the economy. The reduction in Current Account Deficit in FY24 indicates that overall gross savings in the economy as percent of GDP has likely risen in FY24.

Also, how do you see the current inflation playing out?

In FY25, our inflation estimate is tracking at 4.5 percent assuming a normal monsoon and crude oil prices remaining moderate. Core inflation is expected to remain contained with some moderation expected in growth momentum in FY25. Support to listed companies’ profits from reduction in input cost pressures which was significant in FY24, is likely to be incrementally lower in FY25. This is likely to result in softer urban wage growth, impacting urban consumption.

Additionally, capex cycle recovery will need support from private capex, as government capital expenditure (centre plus states) moderates.

RBI norms on consumer credit: Banks see some impact but remain bullish

When do you see a cut in repo rate by RBI?

The first step would be aligning the weighted average call rates with the repo rate. Over the October 2023 to January 2024 period, the weighted average call rate was closer to MSF, as liquidity conditions tightened. The rise in system liquidity deficit is led by a seasonal pick-up in currency leakage, build-up of government cash surplus and lesser support from Balance of Payments (BoP).

The build-up in government cash surplus reflects strong tax collections (liquidity drain) and moderate government expenditure. However, in February 2024, the weighted average call rates moved towards the repo rate, reducing real rates by 25bps.

Hence there has been a change in policy preference from keeping overnight rates closer to MSF, to keeping overnight rates between MSF and repo rate. Hence, the first step of moving overnight rates towards the repo rate has begun.

The next step will be policy rate cuts which are expected to start from June or August onwards. Growth conditions have held up, which has provided policymakers with the space to focus on aligning inflation with the 4 percent target.