Will MPC change repo rate, stance? What Bandhan Bank’s Sanyal thinks

Healthy growth in the financial health of the banking sector is expected during the current financial year, with likely narrowing of growth rates of deposits and credit and continued improvement in asset quality.

The Reserve Bank of India's (RBI) monetary policy committee (MPC) may keep the repo rate unchanged in its first meeting of financial year 2024-25 on April 5, said Siddhartha Sanyal, Chief Economist and Head-Research, Bandhan Bank.

Speaking exclusively to Moneycontrol, Sanyal said that though the repo rate may remain unchanged, the central bank could shift to a neutral stance. “From February 2022, policy rates were pushed higher till February 2023. Over the next one year, the RBI absorbed a large quantum of excess liquidity from the banking system. However, the RBI will now likely move sideways for a few months both on the rates and liquidity front. Accordingly, one feels that the case for a change in the policy stance to ‘neutral’ is stronger now,” said Sanyal.

Noting that a prudent central bank would likely refrain from a rate cut around a major political event like the general election, Sanyal said the RBI may look at rate cuts from August 2024.

Also read: Interview: No change in repo rate likely in April, says BoB’s Madan Sabnavis

Edited excerpts:

What decision will be the RBI’s MPC take on the repo rate, on April 5?

It is almost certain that the monetary policy committee will keep the repo rate unchanged in its upcoming meeting later this week.

Will the central bank look at changing its stance?

I see merit in considering changing the stance of monetary policy to “neutral”. The MPC adopted “withdrawal of accommodation” as the stance of monetary policy in April 2022. Since then, policy rates were pushed higher till February 2023. For the next one year, the RBI absorbed a large quantum of excess liquidity from the banking system. However, the RBI will now likely move sideways for a few months both on the rates and liquidity front. Accordingly, one feels that the case for a change in policy stance to “neutral” is stronger now.

India's headline retail inflation rate stood at 5.09 percent in February. How do you see this for banks?

While a cut in the repo rate is not expected immediately, softening in inflation momentum has enhanced the likelihood of easing of policy rates later in the year. Healthy growth in the financial health of the banking sector is expected during the current financial year, with a likely narrowing of growth rates of deposits and credit and continued improvement in asset quality.

How do you see the current account deficit shaping up?

The current account deficit is expected to be around 1.5 percent of GDP with a downward bias during 2024-25. The Balance of Payment (BoP) surplus will likely be large during the year, reflecting strong portfolio flows and a better foreign direct investment (FDI) outlook.

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

Momentum indicators for the consumer price index (CPI) softened in recent months, with a broad-based moderation in core CPI to a multi-year low of close to 3 percent. Global commodity prices are currently benign. The monsoon is expected to be better with the possibility of La Nina.

Also read: MPC Poll: RBI to leave key interest rates unchanged in April monetary policy, say economists, bankers

The fiscal deficit is following a narrowing trend. Wholesale price index (WPI) inflation hovered around or below zero for several months, thereby reducing the spillover impact on retail inflation. Growth in reserve money or primary liquidity from the RBI averaged merely at around 7 percent year-on-year during 2022-23 and 2023-24, markedly lower than the average of over 16 percent during the five years prior to 2022-23.

Taking all these factors into account one feels that while occasional volatility in CPI driven by agro and primary commodities cannot be ruled out, the CPI inflation average will likely soften to around 4.5 percent during 2023-24, in line with the RBI’s forecast.

When do you see a cut in the repo rate by the MPC?

Based on the forecasts of softening in inflation prints during 2024-25, one expects India’s real repo rate (i.e., the difference between the repo rate and inflation) to reach and even surpass 2 percent for a number of months in the current financial year, warranting a discussion about repo rate cuts later this year. However, the timing of RBI rate easing will involve several other factors.

A prudent central bank will likely refrain from a rate cut around a major political event like the general election. Also, most major global central banks appear to be cautious on easing policy rates. The US Fed is now expected to start easing rates in June. However, the expectation of a Fed cut has altered several times in recent months and is far from certain.

Against that backdrop and given that the RBI’s legroom for the repo rate from the current 6.50 percent is likely limited to only 50-100 basis points, a rate cut by the RBI is unlikely before August.