Informist Poll

RBI Policy: No repo rate cut seen Wed, but stance change expectations rise

Informist, Friday, Oct. 4, 2024

By Team Informist

NEW DELHI – The Reserve Bank of India's Monetary Policy Committee is expected to leave the policy repo rate unchanged at 6.50% on Wednesday for the tenth meeting in a row, although expectations of a change in stance to "neutral" have increased markedly. According to an Informist poll of 30 economists, treasury officials, and fund managers, all but one see the rate-setting panel staying pat on rates next week, with nine respondents predicting the MPC may change its stance to "neutral" from "withdrawal of accommodation". In contrast, only one poll respondent had expected a change in stance ahead of the August MPC meeting.

"We expect the MPC of the RBI to keep rates on hold at its upcoming meeting. However, we see 50% probability of a change in stance to ‘neutral’ particularly as the US Federal Reserve has already cut rates by 50 basis points with more easing expected in the upcoming meetings," noted Teresa John, economist at Nirmal Bang Institutional Equities.

While the MPC will have its hands full with a long list of external factors in the form of the Fed’s September rate cut, the China government's recent stimulus announcements and various geopolitical challenges, all eyes next week will be on the three new external members of the committee. Tuesday, the government named Delhi School of Economics Director Ram Singh, economist Saugata Bhattacharya, and Institute for Studies in Industrial Development Director and Chief Executive Nagesh Kumar as replacements for the outgoing Shashanka Bhide, Ashima Goyal, and Jayanth Varma.

At the MPC's last meeting in August, Goyal and Varma had voted to cut the repo rate by 25 bps to 6.25%. However, they were in the minority.

"While government-appointed MPC members are usually perceived to be dovish, we believe the new members will remain data-dependent and focused on the inflation-targeting mandate," Standard Chartered Bank said in a research report. Central bank watchers, though, see a possibility of Bhattacharya, formerly Axis Bank’s chief economist, voting to cut interest rates on Wednesday.

LAST MILE OF DISINFLATION

Developments on the inflation front have been fairly encouraging since the MPC last met, with CPI inflation for both August and September coming in below the RBI's medium-term target of 4%. The last time inflation had printed below target was way back in September 2019. However, the statistical nature of the fall--a heavily favourable base effect was in play--means the MPC may not go for a rate cut next week as inflation is seen rising close to 5% in September.

According to the RBI's own forecasts, CPI inflation is seen averaging 4.7% in Oct-Dec, up from 3.6% in Jul-Aug.

Meanwhile, the RBI has stressed on aligning inflation with the 4% target on a durable basis, with Governor Shaktikanta Das saying last month that the "last mile of disinflation" must be successfully navigated.

RISING GROWTH CONCERNS

So far, the Indian central bank has taken comfort from robust growth, with the economy expanding by 8.2% in 2023-24 (Apr-Mar). However, signs of some moderation in activity levels seem to be emerging, poll respondents said.

In Apr-Jun, GDP growth slipped to a five-quarter low of 6.7%, missing the RBI's forecast of 7.1%. High-frequency data also suggests a slowdown in the momentum of economic activity, with data released this week showing that India's manufacturing and services Purchasing Managers' Index both hit multi-month lows in September. As such, this could push the MPC to loosen its stance on Wednesday to "neutral", likely setting the stage for a repo rate cut in December, poll respondents said.

"Three developments stand out: softer growth numbers have trickled in recently, inflation has been falling, and the external environment has moved from rate hikes to cuts," economists at HSBC said in a report. "We believe the RBI doesn't gain from waiting any longer," they added.

Of the 26 poll respondents who gave a view on when they see the first rate cut from the RBI, 18 see it in December and three expect it in February. Two respondents were split between December and February, while two don't think interest rates will be cut in FY25 at all. Nomura was the only respondent to expect a rate cut next week.

Curiously, RBI staff mentioned in their monthly State of the Economy article last month that their internal models show GDP growth rising to 7.0% in Jul-Sept--20 bps lower than the RBI’s official forecast--while the full-year growth figure is seen 10 bps higher than the central bank's forecast of 7.2%. Some economists said they expect the RBI to lower its FY25 growth forecast by 10-20 bps on Wednesday.

The following are expectations of respondents on the repo rate and stance of policy from next week's meeting of the Monetary Policy Committee:

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Written by Shubham Rana

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