RBI meeting: 3 things to watch for in the credit policy

Madan Sabnavis

The Reserve Bank of India’s credit policy, to be announced on June 6, will be noteworthy for three reasons. The first would be the change to the repo rate and the stance of the monetary policy committee (MPC). The second would be the inflation forecast and the third would be the MPC’s view on growth.

Most experts agree that the present cycle of repo rate changes will be a sharp one, with the terminal point being 5.5 percent by March 2026 but the point of interest is the roadmap to this target.

It does appear that a cut is almost certain, which would likely take the repo rate to 5.75 percent, the third 25 basis points (bps) reduction in as many meetings.

Such frontloading would gel well with RBI’s liquidity infusion, which has been relentless since February. The liquidity infusion through open market operations (OMOs) and variable repo rate (VRR) worked well when there was scarcity in the system and has added to the surpluses post-March.

There is a strong reason to expect another rate cut this time, as April’s inflation print has come down to 3.2 percent and will be in the same range in the next two months.

This revealed preference of the RBI also indicates that the August policy could witness the final cut, provided the monsoon situation appears conducive for a good kharif crop.

Tracking inflation

The inflation forecast would also be of interest. The current trend is in the downward direction but it has been observed often that we could mistake a trend based on base effects to be the path to be followed in the future too.

The effect of the new Trump tariff system, which is to kick in July 9, will push imported prices higher, given the retaliatory stances taken by several leading trading partners of the United States.

Also, most FMCG companies have raised prices, which cover products ranging from biscuits, paints to mobile phones.

Core inflation is in the 4 percent range and could see an upside even as food prices ease. Vegetable price shock was felt in May due to the early rains and such disturbances cannot be ruled out in the future too.

While it is compelling to use adaptive expectations of extrapolating the present low inflation scenario into the future, the errors in forecasting are still there. Therefore, it would be of interest to see whether the RBI has any downward projection in inflation. If the revised forecast is substantially lower, the terminal repo rate could also be lower than 5.5 percent.

Growth projection

The growth outlook would be the latest official view after the NSO presents the provisional estimates for FY25.

As the FY24 number was revised substantially from 8.2 percent to 9.2 percent, the higher base effect could weigh on the FY25 estimate.

In the same vein, this can provide an upside bias to the FY26 number. Therefore, the RBI's view on how it sees growth playing out this year will also provide support to the accelerated repo rate cut policy, which appears to be the route to be followed.

From a banking perspective, a declining interest rate scenario means that most lending rates linked to the EBLR would come down automatically. The challenge would be to garner deposits when interest rates are revised down.

The stock market has been fairly impressive notwithstanding the global headwinds and still could be on the radar of retail customers.