Informist Poll

Majority sees MPC cutting interest rate in Oct-Dec

Informist, Monday, Jun 10, 2024

By Pratiksha and Shubham Rana

MUMBAI – Economists are veering towards a rate cut by the Monetary Policy Committee of the Reserve Bank of India in Oct-Dec, though they vary on the exact time of the cut, according to a post-monetary policy poll by Informist.

According to the poll, of the 24 respondents, 14 expect the rate-setting panel to cut the policy repo rate in Oct-Dec. While eight of the 14 respondents expect the rate cut to start in October, four expect it in December, and two expect it in either October or December.

Out of the remaining ten respondents, two expect the committee to pivot as early as the next meeting in August.

The rate-setting panel has not changed the policy rate since February 2023, though two out of its six members - Ashima Goyal and Jayanth R. Varma - voted to cut the repo rate by 25 basis points in June. In the April meeting, only Varma had voted to cut the repo rate.

Six respondents expect the MPC to lower interest rates in Jan-Mar quarter. There is only one scheduled meeting in the quarter in February. DBS Bank said it does not see a rate cut in 2024, while Equirus Securities does not see a rate cut in the current financial year ending March.

Economists expect the rate cut cycle, whenever it begins, to be a shallow one of 50-75 bps. Most expect the panel to change the policy stance to "neutral" from the "withdrawal of accommodation" before cutting the policy rate.

On Friday, the committee left the repo rate unchanged at 6.50% for the eighth consecutive meeting. It also maintained the "withdrawal of accommodation" policy stance, as expected.

"In India, with growth holding firm, monetary policy has greater elbow room to pursue price stability to ensure that inflation aligns to the target on a durable basis," RBI Governor Shaktikanta Das said in his statement on Friday.

"While the Monetary Policy Committee took note of the disinflation achieved so far without hurting growth, it remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation," the governor said.

The RBI raised its GDP growth forecast for 2024-25 (Apr-Mar) by 20 bps to 7.2%, after the Indian economy rose faster-than-expected at 8.2% in 2023-24. The RBI kept its inflation projection for the current financial year unchanged at 4.5%.

"With growth momentum remaining strong, RBI's focus is to bring down inflation to 4% level on a durable basis. Given its assessment of growth-inflation mix, the RBI is likely to stay on an extended pause," YES Bank said in a report. YES Bank expects the committee to cut interest rate in December.

Economists took note of the governor's cautious tone on the outlook for inflation, particularly food inflation. "At the current juncture, the uncertainties related to the food price outlook warrant close monitoring, especially their spillover risks to headline inflation," Das said.

India's headline CPI inflation moderated to an 11-month low of 4.83% in April, but is expected to have risen to a three-month high of 5.0% in May because of a rise in food prices. Food inflation was at a five-month high of 8.70% in April.

How food inflation will behave going ahead is dependent on monsoon rains, which are projected to be above normal at 106% of the long period average.

A key takeaway for economists from Das' statement on Friday was that the RBI may not follow the US Federal Reserve in interest rate decisions. "There is a view that in matters of monetary policy, the Reserve Bank is guided by the principle of 'follow the Fed'. I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions," Das said.

"We interpret this statement to mean that even if the Fed easing cycle gets pushed out because of US growth-inflation dynamics, the RBI can ease if inflation in India eases by Q4 (Oct-Dec). On the other hand, if inflation in India stays sticky, the RBI is unlikely to ease even if a Fed easing cycle is underway," Goldman Sachs said in a report.

Interestingly, the next meeting in August will be the last for the three external members, who were appointed for a period of four years. With two of the three external members already pivoting towards a rate cut, it will be interesting to see a stand taken by the other external member, and the three RBI members on the committee.

Following are the expectations of respondents on the rate action:

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