RBI Monetary Policy 2024 Highlights: RBI MPC keeps repo rate unchanged at 6.5%; 7.2% GDP growth seen in FY25, says Shaktikanta Das - The Times of India (2024)

“CPI headline inflation softened further during March-April, though persisting food inflation pressures offset the gains of disinflation in core and deflation in the fuel groups. Despite some moderation, pulses and vegetables inflation remained firmly in double digits. Vegetable prices are experiencing a summer uptick following a shallow winter season correction. The deflationary trend in fuel was driven primarily by the LPG price cuts in early March. Core inflation softened for the 11th consecutive month since June 2023. Services inflation moderated to a historic low and goods inflation remained contained.

The exceptionally hot summer season and low reservoir levels may put stress on the summer crop of vegetables and fruits. The rabi arrivals of pulses and vegetables need to be carefully monitored. Global food prices have started inching up. Prices of industrial metals have registered double digit growth in the current calendar year so far. These trends, if sustained, could accentuate the recent uptick in input cost conditions for firms.

On the other hand, the forecast of above normal monsoon bodes well for the kharif season. Wheat procurement has surpassed last year’s level. The buffer stocks of wheat and rice are well above the norms. These developments could bring respite to food inflation pressures, particularly in cereals and pulses. The outlook on crude oil prices remains uncertain due to geo-political tensions. Assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent. The risks are evenly balanced.”

RBI Monetary Policy Live Updates: “As anticipated, the Reserve Bank of India (RBI) maintained its key policy rates and liquidity stance unchanged during the June 2024 monetary policy review. The RBI revised its annual GDP growth estimate upward for the current year while keeping the retail inflation forecast steady. Several indications from the governor's speech suggest that the RBI is unlikely to commence rate cuts soon. The upward revision in growth, the expectation of a non-linear disinflationary process, and a clear signal that the RBI will not mirror the Federal Reserve's anticipated monetary policy easing, imply that a rate cut in 2024 is improbable,” says Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.

“However, with two of the six monetary policy committee members advocating for easing, and considering the RBI's expectation of continued falling inflation alongside the current high real interest rates, it appears that the RBI may not maintain the policy rates and liquidity tightening stance for an extended period. Today's policy is neutral for financial markets in the near term, but the medium-term implications are positive for both the equity and debt markets,” he said.

RBI Monetary Policy Live Updates: “Inflation is on a declining trajectory, and GDP growth is optimistic. At this stage, the RBI has wisely decided not to lower its guard but to continue working towards ensuring that inflation aligns durably and sustainably with its target.

For the eighth consecutive time, the Reserve Bank of India's Monetary Policy Committee (MPC) has kept the repo rate unchanged at 6.5% in its bi-monthly interest rate decision, amid robust growth momentum. Retail inflation hit an 11-month low in April 2024 at 4.83%, remaining within the RBI's tolerance band of 2-6%.

Borrowers may face continued high interest rates on loans. Since the repo rate directly influences lending rates, an unchanged rate means existing loans remain benchmarked to an elevated repo rate at 6.50 with the possibility of new loans being offered with lower spreads than older loans. Any rate cut in future would lead to lower rates, hence lowering the EMIs that loan borrowers have to pay. However, the fixed-interest loan will not be impacted because of this.

As the wait for rate cuts continues, borrowing costs are likely to increase. However, interest rates on fixed deposits (FDs) are also expected to rise, with banks offering competitive rates to attract more depositors. This is the best time to monitor rates as banks may offer higher interest rates on FDs to attract more deposits, as they try to balance their own lending and deposit rates. This makes it a favourable time for depositors to lock in higher returns on their deposits,” says Adhil Shetty, CEO, Bankbazaar.com.

While India's CPI trajectory will be important for domestic monetary policy considerations, we think the outcome of the US CPI trajectory and the consequent Fed reaction function will be much more critical for influencing the timing and the magnitude of the RBI rate cutting cycle, says Kaushik Das, chief economist, India & South Asia, Deutsche Bank. While achieving a lower CPI trajectory in India will be a necessary condition for the rate cutting cycle to commence, the Fed's reaction function will be far more important, in our view, for the RBI to embark on a definitive rate cutting cycle.

As far as domestic factors are concerned, RBI's CPI inflation target for FY25 is 4.5%, which results in real rates of about +220bps, on a forward looking basis, with effective policy rate sitting at 6.70% at present (as short term rates are averaging 20bps higher than the policy repo rate of 6.50% due to tight money market liquidity). Even if the RBI works with a higher neutral real rate of 150bps, compared to the 100bps that the central bank has indicated as sufficient post the Covid-19 pandemic, even then the policy rate can easily come off by 50-75bps, in our view, he says.

Kaushik Das, chief economist, India & South Asia, Deutsche Bank expects both the policy repo rate and monetary stance to remain unchanged in the June policy. With the policy repo rate remaining on hold at 6.50% for more than a year (RBI delivered the last rate hike in Feb 2023), the main focus has been on liquidity management and the evolution of “effective interest rate” in money markets. Recall that in Oct’23, when US rates were selling off, the RBI did not hike the repo rate, but delivered an effective rate hike by tightening liquidity and pushing up the short-term rates eventually to 6.90%, 40bps higher than the policy rate. From Jan’24, the central bank started infusing liquidity to reduce “over-tightening” risks, so as to push down short-term rates in a lower range of 6.50-6.75%. Since the last monetary policy on 5th April, MIBOR has averaged 6.69%, although in the last few days it is hovering around 6.55%. RBI has been doing both VRR and VRRR of different tenors to fine tune liquidity and guide it more toward neutral territory.

Kaushik Das expects the RBI to keep its FY25 CPI inflation and real GDP growth forecast unchanged at 4.5% and 7.0%yoy respectively. Our own CPI and real GDP growth forecasts for FY25 are 4.6% and 6.9% respectively. We are forecasting Jan-March'24 real GDP to have grown 7.3%yoy, which would result in a 8%yoy growth outturn for FY24. Our forecast for FY25 core inflation is 3.6%yoy, which if achieved, will be 70bps lower than the FY24 outturn of 4.3%. As CPI inflation has averaged 6.4% in July-Sep'23, it can potentially fall below 4% average in July-Sep'24 (DB est.: 3.7% vs. RBI forecast at 3.8%) due to the favourable base effect, absent significant food price shocks in the months ahead.

Current Liquidity trend shows ~Rs 0.6 lakh crore average deficit in FY25

*The Net liquidity was in surplus mode from 1 Apr’24 to 19 Apr’24 with an average of Rs 1.1 lakh crore, then it went to deficit mode with an average of Rs 1.4 lakh crore

*This is mainly due to surplus government cash balances which averaged to Rs 2.5 lakh crore in FY25 (till May)

*RBI has been actively managing liquidity through main and fine tuning operations

*Average supply of liquidity by way of variable rate repo auction held in FY25 is Rs 1.70 lakh crore, and average absorption through variable rate reverse repo auction amounts to Rs 0.32 lakh crore

*Durable/core liquidity surplus has come down to Rs 1.50 lakh crore as on 31 May

A State Bank of India's research paper suggests that the Reserve Bank of India should maintain its current approach of removing accommodative measures. The report, named 'Prelude to MPC Meeting', anticipates that the central bank will reduce the repo rate during the third quarter of the ongoing financial year. However, it also mentions that "such rate cut cycle is likely to be shallow".

Furthermore, the report projects that the Consumer Price Index (CPI) based retail inflation will hover around 5% in May, with the official data set to be released later this month. It is then expected to decrease to 3% in July. The research paper also forecasts that inflation will remain below 5% from October onwards, continuing until the conclusion of the 2024-25 fiscal year.

RBI Monetary Policy Live Updates: According to experts, the Reserve Bank of India (RBI) is likely to keep interest rates unchanged, despite the European Central Bank and Bank of Canada initiating rate cuts. Inflation remains a significant concern for the RBI, likely prompting the central bank to maintain the status quo. The Monetary Policy Committee (MPC) is also expected to refrain from reducing rates, as economic growth is showing signs of improvement. Repo rate has been at 6.5 per cent since February 2023.

The RBI has been tasked by the government to maintain retail inflation at 4 per cent, with a tolerance range of 2 per cent on either side. In April this year, retail inflation stood at 4.83 per cent.

The MPC consists of three external members and three officials of the RBI. External members of the rate-setting panel are Shashanka Bhide, Ashima Goyal, and Jayanth R Varma.