In line with our and market expectations, the Monetary Policy Committee (MPC) of the RBI maintained a status quo on repo rate at 6.50% and the stance in its scheduled policy meeting on Feb 8, 2024.  This marked the sixth consecutive monetary policy of no action on rates accompanied by the unaltered stance on “withdrawal of accommodation’; effectively, completing one full year of status quo. 

• Status quo on rates and stance was backed by all MPC members but one. 
• Prof. Jayanth R. Varma also voted for a 25 bps cut along with a change of stance to neutral (which had been his opinion earlier also)
• The policy stance was retained by MPC with an identical language “to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth” – as against a small section of market participants expecting RBI shifting the stance to neutral. 

Macro-Economic Outlook:

With respect to FY25 economic outlook -

• The RBI pegged FY25 GDP growth forecast at 7.0% which was a bit of surprise for the markets. On a quarterly basis, the central bank projects GDP growth at 7.2% in Q1 FY25 (revised up from 6.7% earlier), 6.8% in Q2 FY25 (revised up from 6.5% earlier), 7.0% in Q3 FY25 (revised up from 6.4% earlier), and 6.9% in Q4 FY25. 
• This implies that growth expectations for Q1-Q3 were revised up significantly by 50 bps, vis-à-vis RBI’s Dec-23 projections – reinforcing RBI’s view of current growth momentum continuing well into FY25 without any significant moderation. 
• Forecast for FY24 CPI inflation was retained at 5.4%, while that for FY25 was introduced at 4.5%. On a quarterly basis, the central bank expects CPI inflation at 5.0% in Q4 FY24 (revised lower from 5.2% earlier), 5.0% in Q1 FY25 (revised lower from 5.2% earlier), 4.0% in Q2 FY25, 4.6% in Q3 FY25 (revised lower from 4.7% earlier), and 4.7% in Q4 FY25.

Key Takeaways, Outlook 

While there is a growing comfort on domestic growth outlook since the last policy review in Dec-23, CPI inflation too has moved higher over Nov-Dec-23 led by food inflation, underlining the volatility in food inflation. Clearly, this is likely to have wielded the steadfast monetary policy outcome in Feb-23. 

There are other developments (recent and impending) that reinforce the virtue of maintaining the displayed patience by RBI. From a global perspective –

• The threat of a global slowdown has abated. IMF, in its latest World Economic Outlook, upped its 2024 global growth forecast to 3.1% from 2.9% earlier. 
• The strength in US growth exceptionalism, has continued into 2024 with noticeable strong labour market data. This has rolled over expectations of US Fed beginning its rate easing cycle to May-24 vs. Mar-24 earlier, along with a reduction in cumulative quantum of consensus rate cut expectations in 2024 to 100-125 bps from 125-150 bps earlier. 
• Risks from ongoing Red Sea disturbance need careful monitoring, for any negative consequences for core inflation via higher insurance/logistic costs. 

From a domestic perspective –

• With the expectation of El Nino fading out completely by Apr/May-24, it may be worthwhile to wait to confirm the possibility of a normal monsoon outcome in 2024
• Presentation of the full budget post elections in Jun/Jul-24
• Last but not the least, a move towards durable reduction in headline CPI inflation. With seasonality kicking in Q4 FY24 along with impact of administrative playing a catch-up, incremental inflation trajectory over the next 6 months is likely to offer relief. However, the recent history marked by volatility, warrants a virtuous wait rather than preemptive conclusion on inflation trajectory

As such, we maintain our call for an extended pause. We expect MPC to start easing monetary policy from mid-FY25 (Aug-24 and onwards) as we believe policymakers will start having reasonable visibility on the durability of attainment of 4.0% inflation target by then. 

On liquidity front, RBI actions will be in conjunction with its monetary policy stance. As such, we expect RBI to continue to gradually withdraw core liquidity surplus till transmission of past monetary actions is complete. Meanwhile, as RBI Guv alluded to in his speech, the volatility in liquidity owing to exogeneous factors is likely to get managed by deployment of appropriate mix of tools to moderate the systemic liquidity. This is likely to ensure an orderly movement of money market interest rates.  

G-sec view

From G-sec perspective, the ‘steady for longer' rates possibly over the next 2-3 meetings is unlikely to offer any support to bond market. Instead, it is the expected improvement in demand-supply dynamics (interim budget pegged gross borrowing lower vis-à-vis market expectations) that will provide relief to the bond yields over the next six months along with the index related passive FPI debt flows. 

We continue to expect range bound movement in g-sec yields with likelihood of moderation towards 7.00% levels by Mar-24. Going forward, 10Y yield could moderate further towards 6.50% levels by Mar-25 with support from the anticipated monetary policy pivot by the RBI later this year.   

Says Suman Chowdhury, Chief- Economist and Head- Research “It was no surprise that RBI MPC decided to keep the status quo on the interest rates for the sixth consecutive time. However, RBI has sounded less dovish if not hawkish as compared to market expectations; there have been no indication of the timing of the change in monetary stance from “withdrawal of accommodation. 

RBI continues to remain fairly optimistic on the growth prospects of the Indian economy. They have significantly upgraded their growth prospects for the next fiscal to 7.0%, reflecting that there are minimal concerns on any material growth moderation at this time. RBI’s assessment on global growth also appears to be positive vs last year and it also believes that central banks are unlikely to resort to a pivot within a short period. The outlook of Acuité Research on the domestic growth prospects, however, remain moderate with a base forecast of 6.3% for FY25, given the visible weakness in the private consumption growth which is estimated at 4.4% in FY24 in the NSO estimates.   

On the inflation front, the base forecast for headline CPI in FY25 is set at 4.5% which has significant upside risks if the growth really maintains such a high level of momentum and if there are even moderate risks in the monsoon behaviour.

The governor highlighted the significance of the “last mile of disinflation” and also indicated that the monetary transmission is still incomplete. Given such a background, the central bank will continue to prefer a slightly tight liquidity position. The liquidity has been in deficit since Sep-23 and the system liquidity deficit has widened progressively. However, RBI hasn’t announced any specific steps to address the visible volatility in short term rates apart from indicating that the tools of “VRRR/VRR” will be used to balance the liquidity position. 

Given the tone of the MPC statement and the expectation of growth buoyancy, we believe that RBI is not in any hurry to cut rates in the next six months. In our opinion, the short term rates will continue to remain high in the near term. We also expect bank deposit rates to show a marginal increase by 25-50 bps, given the continuing gap between credit and deposit growth.

On the financial stability front, the focus on higher disclosures and transparency on the “all in cost” of retail and MSME loans for banks is a step in the right direction. This may slow down the growth of processing fees in retail and MSME loans in the financial sector.” 

Chart 1 : CPI inflation trajectory (RBI forecast) is expected to drift lower in FY25 assuming a normal monsoon but not likely to attain the target of 4.0%