Governor Shaktikanta Das is in the spotlight as the Reserve Bank of India holds a monetary policy meeting. On October 9, he is expected to report on the benchmark interest rate. The Monetary Policy Committee (MPC) is expected to keep the repo rate at 6.50% as predicted by economists.
As HDFC Securities’ MD and CEO, Dhiraj Relli explained, “the possibility of a change in stance to neutral is on the table,” even though we do not anticipate the RBI to start its cycle of rate decreases. The MPC may decide to keep the repo rates at 6.50% for a tenth consecutive period. Although it’s still very much up in the air, the RBI may adopt a no-change policy while just modifying its stance.
Many important factors, including inflationary pressures, uncertainty in the world economy, and regional growth patterns, are anticipated to be considered by the MPC. “This policy is expected to be interesting, particularly when new external members assume positions,” YES Bank Chief Economist Indranil Pan said.
Recent statistics, which includes a drop in the PMI, a reduction in the growth of passenger cars and two-wheelers, and a decline in personal loans, point to a downturn in the Indian economy. This, along with the start of the US Federal Reserve’s rate cycle, has spurred discussions about the RBI perhaps shifting its position or even lowering rates. We believe that while growth is slowing, it is not collapsing.
On the other hand, the RBI has been very vocal about its determination to reduce inflation to 4%. Pan added that progress has been made in this direction due to good rainfall and quality lakes, which could help bring food inflation down in the coming months. However, the RBI still needs to be wary of global risks such as a sudden spike in commodity prices or a recovery in the Chinese economy.
Pan believes, “Growth is not slowing down but there are some ongoing risks on the price side and the best thing for RBI is to stay on the sidelines. From now on, any policy goes live, and future data will guide RBI decisions. While there is uncertainty about when the rate cut cycle will start, it is likely to be shallow, only down 50-75.”
Emkay Global Financial Services states that the RBI will find it difficult to balance its policy biases given the complex global economy, comfortable banking liquidity, easy financial conditions, decreasing growth, unpredictable food prices, and the illusive 4% inflation objective. The best course of action for the MPC to get ready for the beginning of a gradual easing cycle, which might begin in December, may be to shift to neutrality with a focus on being “actively disinflationary,” even though there may not be a rate adjustment in the future policy.
“At this point, a repo rate cut could positively impact India’s consumption demand and overall economic growth,” stated Sanjeev Agrawal, President of the PHDCCI. “India’s inflation is coming down significantly.” A healthy harvest is suggested by the robust kharif crop sowing, which will increase supply and help keep the inflation trend under check. Rate reductions will be required to maintain growth and increase output as inflation in many economies declines.
Petroleum Prices and Geopolitical Tensions The RBI is nonetheless wary about international threats, including the escalating geopolitical unrest in West Asia, which can raise oil prices and cause domestic inflation. “The MPC meeting is taking place against the backdrop of geopolitical tensions between Iran and Israel, and any further escalation could increase inflationary pressures,” according to a JM Financial article.
This is reflected in RBI’s inflation estimates, which remain high at 4.5% for FY25, compared to the objective of 4%. Despite the RBI’s 7.2% GDP estimate for FY25, which indicates growth optimism, high-frequency indicators are showing symptoms of slowing down. The PMI for manufacturing and services has somewhat decreased, and more drops in trade activity could have an effect on GDP growth and put more strain on the external account.
Though major international economies such as the U.S. have hiked rates because of geopolitical worries, slower growth in deposits, and rising crude oil costs, Suresh Darak, Founder and Director of Bond Bazaar, believes the MPC will stick with the existing rates.
The United States Federal Reserve’s Decision’s Impact Geopolitical pressures are not the only major world events at play; the U.S. Federal Reserve recently slashed interest rates by 50 basis points. Rates have lately been lowered by other significant economies in reaction to declining inflation, including the Eurozone, the UK, and China. The RBI bases its decisions on domestic issues, as Governor Shaktikanta Das has made clear.
Gaura Sen Gupta, Chief Economist of IDFC First Bank, observed, “For RBI policy, domestic factors are key. The course of food inflation will determine when rates are lowered. If growth circumstances remain stable, we anticipate a shallow rate drop of approximately 50 basis points by March 2025. By December 2024, it is anticipated that the RBI will have lowered rates and maintained the October policy status quo. The upcoming months should see a decrease in food inflation because of the favorable monsoon distribution.
Similar to this, Barclays stated that the MPC will not alter course during the October meeting, acknowledging the Fed rate cut but not giving it much attention while discussing policy. The MPC will concentrate on the domestic economy, stressing in its communications the outlook for inflation as well as the robustness of GDP. We anticipate that the Governor will continue to emphasize the importance of closely monitoring inflation while maintaining a disinflationary posture, in a consistent tone.
New Members of the MPC The government has appointed three new members to the monetary policy panel of the RBI: Professor Ram Singh, the director of the Delhi School of Economics at the University of Delhi; Dr. Nagesh Kumar, the director and chief executive of the Institute for Studies in Industrial Development; and economist Saugata Bhattacharya. They take the place of two departing members who had previously voted in favor of rate reductions.
Although it is early to anticipate the new members’ policy stances, analysts speculate that they will probably adopt a more impartial and balanced approach. Sonal Varma, MD, Chief Economist at Nomura for India and Asia (apart from Japan), pointed out that although Saugata Bhattacharya had earlier advocated for rate decreases in August, it is unclear if his opinions have changed since then.
Barclays Regional Economist Shreya Sodhani stated, “We anticipate the MPC to maintain the position of ‘removal of accommodation’ and maintain the policy rate at 6.50% during the meeting from October 7-9. We think that enough information will be available by the December meeting to imply lessening inflation pressures, opening the way for a rate drop, though there might be at least one dissenting vote. But there’s still a chance that the cut might occur later rather than sooner.”
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