RBI MPC preview: A status quo on rates or a cut coming soon?

India’s retail inflation slowed to an 18-month low in April to 4.7 per cent from 5.66 per cent in the preceding month. While the numbers are within the tolerance band of the central bank, it believes the fight against inflation is not over yet.

In the April 2023 policy meeting minutes, governor Shaktikanta Das said Inflation might soften in FY24, but the disinflation towards the target is likely to be slow and protracted.

Terming the pause in a rate hike as a tactical pause and not a pivot or a change in policy direction, Das said the central bank would continue to monitor all incoming information and undertake a forward-looking assessment of the evolving economic outlook.

“Our fight against inflation is far from over and we have to continue with our efforts to bring down inflation closer to the target over the medium term,” Das said.

In April, RBI announced a pause in rate hikes but did not change its policy stance from “withdrawal of accommodation” as it wanted to stand ready to take steps if required.

Read more: RBI minutes: Shaktikanta Das says pause in repo rate tactical not pivot as fight against inflation far from over

Brokerages & analysts expect a pause

Barclays Securities expects the MPC to keep the repo rate unchanged at 6.5 per cent at the 8 June meeting, considering the moderating near-term inflation trajectory and resilient domestic economic activity. It expects the RBI to stay on hold through FY24 amid a gradual decline in inflation and some moderation in growth arising from external headwinds.

“The MPC is likely to highlight the need to evaluate the impact of existing rate hikes on inflation and aggregate demand as a justification to keep rates unchanged. Possible risks to headline inflation, including the likely occurrence of an El Nino this year and some stickiness in core inflation from resilient economic growth could imply the RBI will remain on pause in the near term,” said Barclays.

The global financial firm believes the MPC’s forecasts for CPI inflation and GDP growth for the current fiscal year FY 23-24 will be closely watched. At the same time, it expects the MPC to revise its near-term inflation forecasts lower while keeping its growth projections unchanged.

Besides, it does not expect a rate cut anytime soon.

“Considering the RBI’s hawkish rhetoric and cautious stance on inflation, we do not expect rate cuts to begin any time soon. We think the central bank should have fewer concerns about growth as high-frequency indicators still show solid domestic activity, albeit with some expected slowdown in industrial output and exports,” said Barclays.

Pankaj Pathak, Fund Manager- Fixed Income at Quantum AMC expects the RBI to maintain a status quo on rates.

“Most likely, we have already seen the last rate hike in February and the RBI will remain on an extended pause on policy rates in the foreseeable future,” said Pathak.

Pathak said the key thing to watch in the upcoming monetary policy would be the RBI’s policy stance. Till the last year, the monetary policy was ultra-accommodative with the policy repo rate significantly below their normal levels and the banking system flooded with liquidity. Now, the repo rate at 6.5 per cent is very close to its long-term average, Pathak observed.

“Liquidity is still in surplus, but it has come down to a level which can be taken as close to normal and as non-inflationary. So, there is a strong case for the RBI to retire the phrase withdrawal of accommodation,” said Pathak.

Along similar lines, Churchil Bhatt, Executive Vice President and Debt Fund Manager at Kotak Mahindra Life Insurance Company said that the market doesn’t seem to be anticipating an immediate rate cut.

He said the best case for the June policy would be a softer ‘stance’ by the MPC.

“The current policy stance of ‘withdrawal of accommodation’ has already run its course, with pandemic-era policy accommodation behind us. It’s only a matter of time before the MPC moves to a ‘neutral’ stance. In the absence of a major global risk event, we may be in for a prolonged policy pause. In June, MPC is likely to maintain a status quo on rates. Everyone will be closely following the speech of the RBI governor,” said Bhatt.

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Updated: 02 Jun 2023, 03:04 PM IST