At its meeting on June 8, the Reserve Bank of India’s (RBI) monetary policy committee (MPC) will likely vote to keep its benchmark repo rate unchanged at 6.50%, 14 economists polled by FE said.
A higher-than-expected gross domestic product (GDP) growth of 6.1% in the fourth quarter of FY23, retail inflation easing to an 18-month low of 4.70% in April and expectation of further correction in retail inflation in May are the key reasons cited by economists for a rate pause. After raising the repo rate cumulatively by 250 basis points since May 2022, the MPC had voted unanimously for a pause in April.
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Another reason why the RBI may keep the policy rate unchanged in the near term is the scaling down of rate hikes by central banks in advanced countries and the likely policy rate pause in these countries in the near future, Sujan Hajra, chief economist and ED, Anand Rathi, said.
Radhika Rao, executive director & senior economist at DBS Group Research, expects the monetary policy committee to vote unanimously for a pause. “The decision to extend the stance could see a split vote as the doves prefer to close the door on further tightening as inflation beats a retreat. We feel 2QFY23 inflation will undershoot RBI’s forecasts,” Rao said.
While the MPC had voted unanimously in favour of a pause in the previous MPC meeting, external member Jayanth Varma had dissented on leaving the stance unchanged at “withdrawal of accommodation”.
“I am unable to reconcile the language of the stance with the simple fact that no further “withdrawal of accommodation” remains to be done since the repo rate has already been raised to the 6.50% level prevailing at the beginning of the previous easing cycle in February 2019,” he had said.
El Nino impact
According to Indranil Pan, chief economist at YES Bank, the RBI will watch for the progress of the southwest monsoon, given the fears of an El Nino effect, and hence a poor monsoon. “The impact of the same on prices needs to be watched. Thus, from the inflation side, the RBI needs to be patient. Growth in India has also held relatively stable despite tighter interest rates,” Pan said.
Aditi Nayar, Icra Ratings‘ chief economist, expects CPI inflation to ease further to 4.5%-4.7% in May-June, with a Q1FY24 print of 4.7%, well below the MPC’s projection of 5.1% for that quarter. While this would support a reduction in the MPC’s inflation forecast for FY24, concerns about the monsoon may dissuade the MPC from the same.
“With El Nino expected to materialise only in H2 of the monsoon season, kharif sowing may not be significantly impacted. However, any subsequent deficiency in monsoon rainfall could affect kharif yields and winter sowing, and thereby food inflation, which poses a risk to the CPI inflation trajectory in H2 FY2024,” Nayar said.
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Liquidity management
A majority of economists polled said market participants will keenly eye the central bank’s comments on liquidity management.
Anubhuti Sahay, head of South Asia economics research at Standard Chartered Bank, said guidance on liquidity management will be closely watched amid increased volatility in overnight rates in the recent past. While RBI’s recent announcement on variable repo rate (VRR) has been welcomed, a clarity on its perspective on evolution and management of liquidity will be keenly focused on, Sahay said.
Gaura Sengupta, India economist at IDFC First Bank, said she expects liquidity conditions to be maintained such that weighted average call rate remains near the repo rate. She added that the current stance of withdrawal of accommodation has not prevented the RBI from conducting two-way operations such as VRR auction and variable reverse repo rate (VRRR) auction. On Thursday, the central bank said it will hold a 14-day VRRR auction of `2 trillion on June 2.
Deepak Jasani, head of research at HDFC Securities, said, “… Currently, the issue in the market is the tight liquidity condition. Liquidity is in surplus by a very small amount. What the RBI is not doing through rate hikes, it is doing through liquidity management.” He said the RBI may relax liquidity to some extent in the upcoming monetary policy and that the earliest chance that the RBI could cut repo rates could be in Q3 or Q4.
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