RBI policy review: The six-member monetary policy committee of Reserve Bank of India (RBI) is unlikely to cut repo rate in its review today, despite global rate cut expectations, an improving monsoon and softer credit growth. Economists said the Shaktikanta Das-led committee may choose to wait for a durable fall in food inflation. They noted that open market operation (OMO) sales are underway, India's growth is still strong and the prevailing financial conditions are loose that warrant a status quo today.
The stock market though will eye any change in policy stance to 'neutral' and signals on rate cut trajectory.
At present, the repo rate stands at 6.50 per cent. The RBI has been maintaining its policy stance of “withdrawal of accommodation,” for some time, even as central banks such as the ECB and BoE have initiated rate cuts, while the US Fed is likely to cut rates in September.
In the June policy review, two of six MPC members argued in favor of rate cuts, led by their perception of weakening growth signs, higher sacrifice ratios, and higher-than-required real rates. This argument could gain further traction among neutral members amid spillover of a global growth scar, economists said.
"The RBI's decision to maintain its stance is driven by domestic inflation concerns, notably within the food sector. This focus suggests a calculated wait-and-see approach, aiming for sustainable achievement of the 4 per cent inflation target, before considering any rate adjustments," said Arsh Mogre, Manager - Economist at PL Capital.
Pranjul Bhandari, Chief Economist for India and Indonesia at HSBC Global Research said while rains have improved, it is all very recent. The RBI may want to track for another month the monsoon, temperatures and sowing data before it gets confident that food prices will keep falling, she said.
"In recent weeks, the government, the central bank, and the markets regulator have all spoken about excesses in India's equity markets. Alongside this, banking sector liquidity has eased (currently at a Rs 2.6 lakh crore surplus). Overnight rates have fallen 20-25 bps since the last policy meeting, and are currently trending below the repo rate. Finally, as the government ramps up spending, liquidity could ease further (given government cash balances at the RBI are close to Rs 2 lakh crore)," Bhandari said.
Bhandari said to take out some of the excess liquidity, the RBI has been conducting over-the-counter Open Market Operation (OMO) sales.
To change its stance to 'neutral' from the current 'withdrawal of accommodation' may seem odd at this point, she said.
Lastly, Bhandari said it is hard to argue that overall growth is slowing, even as there are pockets of weakness. Services exports, passenger vehicle sales, and PMI manufacturing and services continue to remain strong, she said.
Emkay Global's economists noted the global ‘Goldilocks’ macro narrative is suddenly faced with deep cracks, while the Yen carry unwind post-BoJ hike is having a ripple effect across the world.
"There is a good possibility of volatility becoming a recurring theme through H2CY24, amid sharply evolving macro conditions with growth scare, positioning, and geopolitics. These developments will interact to shift the Fed’s perception of risk decisively toward labor market weakness and tricky financial markets, and could open a case for more forceful rate cuts ahead," it said.
Emkay noted that markets are now pricing in 115 bps Fed cuts by end-December against a 50bps cut as seen in the June MPC policy. Global commodities are softening, with Brent down 4.5 per cent month-on-month. All these will feed heavily into the RBI’s reaction function, it said.
Mahendra Kumar Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers sees status quo on rates, even as expectations for rate cuts are increasing with Fed signalling likely easing in the next meeting.
"Any fall in interest acts may provide scope for higher returns in mutual funds. FD investors who receive a fixed rate return may consider switching to appropriate debt mutual fund after consulting with respective advisors and keeping in mind the risk profile.
Jajoo noted that bank deposits have grown at a rate much slower than credit in recent times. Banks also did not increase deposit rates enough when the market rates were moving higher. For example, the rate on savings deposit on many banks is still around 3 per cent.
"As such, there seems no immediate scope for lowering rates in this segment. In longer maturity deposits also, rates seem unattractive compared to market rates. As such, it seems unlikely that bank may be able to lower the deposit rates by any significant margin for now," he said.