GoodReturns Poll: RBI To Keep Repo Rate Steady In April, First Cut Seen In Aug-Oct

All eyes are once again set on the Reserve Bank of India (RBI) who will be announcing the first bi-monthly monetary policy for FY25 later this week. The 3-day meeting of the six-member MPC chaired by RBI governor Shaktikanta Das will commence on Wednesday, April 3rd. As per a poll of 45 economists conducted by GoodReturns.In, the central bank is expected to hold key policy rates and stance. A rate-cut scenario is seen in the second half of the year.

Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank Of India said, "India a notable exception to strong evidence of Emerging Economy Central Bank rate actions being predicated by Advanced Economy Central Bank rate actions ...Structural shifts underway in US markets with coexistence of low unemployment rate coupled with elevated job vacancy rate...inflation is currently being driven by food price dynamics... We expect deposits and credit may grow 14.5-15% and 16.0-16.5% respectively in FY25.... RBI might cut rates only in Q3FY25."

Ghosh added, "We believe the stance should continue to be withdrawal of accommodation."

Also, Abhishek Upadhyay, founder of Power of Markets said, "Coming to the RBI poll we are thinking that in April 2024 Bimonthly policy RBI may maintain status quo. Hence repo rate will be continue to at 6.5%, SDF at 6.25% & Bank Rate & MSF continue to at 6.75%. CRR at 4.5% and SLR at 18%."

Similarly, ING in its note said, "We think it would be extremely unlikely that the Reserve Bank of India will make any change to their policy rates at this meeting, and like most other central banks in the region, will hold until the Federal Reserve starts easing. The policy rate will remain 6.5%, one of the highest in the region."

However, 2 economists believe that the possibility of a change in stance cannot be ruled out with inflation staying well below RBI's upper tolerance limit. Meanwhile, 2 economists believe that RBI may change its policy stance to 'Neutral' on Friday.

Parijat Agrawal, Head - Fixed Income, Union Mutual Fund said, "We do not expect any change in the policy rate, but a probable explicit or implicit change in stance cannot be ruled out. RBI may acknowledge that core inflation is trending down. We expect growth projections to continue to remain robust. RBI is expected to touch upon the smoothening of liquidity conditions. Systemic liquidity shall improve going ahead. "

Accordingly, these economists predict a 6.5% repo rate during April-May 2024 period.

In terms of April's policy impact on the stock market, Dr V K Vijayakumar, Chief Investment Strategist, at Geojit Financial Services said, "The April 5th policy announcement is unlikely to impact the market, given the current market mood and resilience. The market is presently influenced by retail investor enthusiasm, the sustained flows into the market via mutual funds and fundamental support from good GDP growth and decent corporate earnings."

Furthermore, the poll showed that the repo rate will be broadly maintained at 6.5% even in the June-July 2024 policy. However, a couple of them expect a change in policy stance, while only one economist predicted a rate cut in the June policy.

Coming to rate cut expectations, the majority of these economists expect an easing in policy and a lowering of interest rates in the second half of FY25. The majority of them predict a 50-75 basis points rate overall in the fiscal, but the first rate cut is seen broadly from either the August or October 2024 policy.

Nonetheless, RBI policy repo rate is seen at 5.75% to 6%.

Upadhyay himself expects a 25 basis points rate cut in the June-July policy, and another 25 bps cut between October to December 2024 policy.

Overall for FY25 repo rate can be slashed to 6%, he said.

On the economic front, Upadhyay pointed out 5 key factors to expect during RBI's upcoming policy. He said:

1. CPI in India is on a downward trajectory, we are expecting it will come down to the levels of 4.5 to 5% in upcoming quarters.

2. GDP growth looks attractive to around 7 to 7.5% for FY24 & for FY25 we forecast GDP growth can be around 6.8 to 7%.

3. Liquidity in the banking system is appropriate.

4. Global commodity price also looks premium and this is the concern point. Gold and crude oil can continue to trade in the upper zone of prices for some time. These commodities are the risk available in global commodity markets.

5. Global inflation is the cause of concern, but the trajectory is on the downside. In the US we are expecting inflation to come down to the levels of 2.5 to 2.75 % in upcoming quarters.

On the other hand, Vijayakumar said," Even though rate cuts can be expected this year, the time is not yet conducive for a rate cut. The growth momentum in the economy is strong and FY 24 is likely to register GDP growth of 7.6%, much ahead of the initial estimates. It is possible for India to achieve a growth rate of 7% in FY25. So, a rate cut is not warranted now."

In the previous policy, which was the last one for FY24, RBI decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. Also, MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

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

Recently, India's consumer price index (CPI) inflation eased to 5.09% in February 2024, compared to 5.10% in the previous month. However, the latest inflation print was slightly below market expectations. Nonetheless, retail inflation stays below RBI's upper tolerance limit of 6% for the sixth consecutive month. Currently, core inflation remains below 3.4% which offers significant reassurance.

With risks evenly balanced, RBI as of now has projected CPI inflation at 4.5% for FY25 with Q1 at 5.0%; Q2 at 4.0%; Q3 at 4.6%; and Q4 at 4.7%. In the case of GDP growth, RBI sees real economic growth at 7% for FY25, with Q1 at 7.2%; Q2 at 6.8%; Q3 at 7.0%; and Q4 at 6.9%.

The six-member MPC to take the call on RBI policy are -- Dr Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, RBI governor Shaktikanta Das, and Prof. Jayanth R. Varma.