GoodReturns Poll: RBI To Hold Rates On February 8, First Rate Cut In...

The Reserve Bank of India (RBI) is back in the limelight for its bi-monthly monetary policy. Six-member monetary policy committee (MPC) chaired by RBI governor Shaktikanta Das will commence its three-day last policy meeting for FY24 from February 6 to 8. The majority of economists expect RBI to continue on its status quo path, keeping the repo rate at 6.5% and focused on the withdrawal of accommodation stance, as per a poll of 25 economists conducted by GoodReturns.In.

As per the poll, 25 economists are predicting a status quo with the repo rate at 6.5%, the standing deposit facility (SDF) rate remaining unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

Also, these economists expect the MPC to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.

Dr Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI said, "We expect the RBI to continue to pause stance in upcoming policy. Strong US non-farm payroll data and wages seem to have pushed back on market expectations for a quick pivot to rate cuts."

Ghosh also expects the stance should continue to be the withdrawal of accommodation.

"We agree with consensus expectations that the MPC will keep policy unchanged at the conclusion of its meeting on Thursday 8th February. Further ahead, the strength of the economy and still-elevated inflation suggest that the central bank will be in no rush to cut the repo rate," Thamashi De Silva, Assistant India Economist at Capital Economics said.

Additionally, these economists also do not see the interim budget announcements to impact RBI's decision this week.

RBI is expected to hold rates on February 8 despite the CPI inflation rate being well within its upper tolerance limit of 6% for the fourth consecutive month.

In December 2023, the inflation print was at 5.69%, although slightly high from 5.55% in November, but better than the street's forecasts of 5.87%. Nevertheless, inflation in December was the highest rate in four months, owing to a sharp surge in food inflation to 9.5% from 8.7%.

A rate cut is warranted in 2024 on the backdrop of resilient economic growth, reforms, policies, and a better-than-expected inflation rate. RBI is an inflation trajectory central bank and its policy outcomes surround the movement in the CPI indicator.

But when will RBI cut rates? That's one question which is currently difficult to answer. That is because economists are of split opinion regarding rate cuts, however, the majority of them so far have predicted a rate cut in the second half of the current year.

The poll showed that the majority expect RBI to maintain the repo rate at 6.5% even in the first bi-monthly monetary policy of FY25. That will be taking place in April 2024. There is only 1 economist who expects a 25 bps cut during this time.

Three economists predict RBI to trim the repo rate in June policy by 25 bps, while most of them see RBI to onset rate cut cycle in the second half of 2024. In FY25, the consensus of the poll is that RBI is expected to bring the key repo rate to 6%, which means a 50 bps rate cut in the entire fiscal is expected.

Abhishek Upadhya Founder & Proprietor Power said, "Overall for FY25 repo rate can be slashed to 6%." Further, in detail, Upadhya explained that CPI in India is on a high trajectory but we are expecting it will come down to the levels of 5 to 5.5% in upcoming quarters, while GDP growth also will be around 6.8 to 7%.

He further said, "Liquidity in banking will be appropriate once the Additional CRR will be waived out completely." Upadhyay has predicted a 25 bps rate cut each in July-September and October-December 2024.

On the global front, he said, "Global inflation is looking to peak out soon and we might see neutral to accommodative monetary policy."

"We agree with consensus expectations that the MPC will keep policy unchanged at the conclusion of its meeting on Thursday 8th February. Further ahead, the strength of the economy and still-elevated inflation suggest that the central bank will be in no rush to cut the repo rate. We expect the RBI to only start easing policy in Q3 once headline inflation is closer to the 4% midpoint of the 2-6% target range.

Also, De Silva in her note said, "We expect the RBI to only start easing policy in Q3 once headline inflation is closer to the 4% midpoint of the 2-6% target range."

After interim budget announcements, Kotak Institutional Equities said, "Inflation is likely to moderate further in the next few months, leading to the beginning of the rate cut cycle by late-1HCY24 to early-2HCY24. However, given large global uncertainties, risks to inflation remain, which could lead to a shallower rate-cut cycle than previously anticipated. Accordingly, we expect the RBI MPC to weigh the risks and remain cautious, and start its rate cut cycle in 2HFY25."

SBI's economist also expects a first-rate cut in the second half. Ghosh said, "First rate cut on table from Jun'24....Aug'24 looks the best bet now..."

Further, SBI's economist expects CPI to come around 5.4% in FY24 and 4.6% to 4.8% in FY25.

Also, on CPI print ahead, Madhavi Arora, Lead Economist, Emkay Global Financial Services said, " The inflation downtrend will be more visible in 4Q, averaging 5.1%, while core could be sub 3.75%. We see FY25E headline inflation at near 5.2% (FY24E:5.37%), while core would average much lower -- near 4%, after ~4.42% in FY24E. That said, we don't see any action by the RBI, and it is unlikely to precede the Fed in any policy reversal."

RBI's policy decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.