GoodReturns Poll: RBI To Keep Repo Rate Unchanged At 6.5%, When To…

The Reserve Bank of India (RBI) is likely to cut its repo rate either in October or December this year, as per economists in a GoodReturns Poll. Although India is positioned as a bright spot in the global economy with its resilient growth, inflation risks still pertain, due to sticky food prices in a scenario of heightened geopolitical dynamics. Hence, in August policy, RBI is expected to hold key rates at 6.50 per cent for the ninth successive time, all 52 economists unanimously said.

"RBI is unlikely to cut rates in August since CPI inflation continues to be high at 5.08 %," V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said.

GoodReturns received an overwhelming response from 52 economists in an RBI policy poll conducted between July 25 to August 4. All of them are expecting a status quo in the August policy. However, opinions were mixed when asked about the timeframe of upcoming rate cuts.

Explaining, Madan Sabnavis, Chief Economist, Bank of Baroda said, "We do expect a status-quo position to be adopted by RBI in the forthcoming credit policy. Inflation remains high even today at 5.1% and while this will come down numerically in the coming months, it will be more due to the base effect. Growth is on the stable path which means that the present interest rate situation does not militate against business."

On the other hand, although the majority of these economists believe that RBI will continue the 'withdrawal of accommodation' policy stance in August. However, three of them expect dovish remarks from RBI on August 8th, while two of them even predict a change in policy stance.

When asked about whether RBI will be on Wait And Watch for the rest of 2024, two of the experts believe the current neutrality in RBI policy stance to remain intact until December. On the contrary, one expert stated that the current economic scenario offers flexibility to RBI in easing its stance.

However, one expert suggests that RBI is likely to remain hawkish for a longer period.

An economist highlighted that the first policy rate easing is likely to be preceded by the probable change of stance to "neutral" which is likely in the October-December 2024 quarter.

Aditi Nayar, Chief Economist, Head of Research and Outreach at ICRA said, "High growth in FY2024, combined with the inflation of 4.9% in Q1 FY2025 are unlikely to shift the voting pattern of the four members who voted for a status quo in the June 2024 meeting towards a change in stance or rate cut in the August 2024 meeting itself."

Meanwhile, Sabnavis added that the RBI would rather wait and be sure that inflation is on the downward path on a durable basis before taking any action.

Bank of Baroda economist further does not expect any change in GDP forecast, there is a possibility of new guidance on inflation numbers.

In regards to which month RBI will start to cut rates, a total of ten analysts recommendations or 50% of the comments point out the rising risk for RBI to delay cuts beyond this CY2024.

Out of these 10 analysts, many positively expect rate cuts to be phased out by the end of this year and begin by the third quarter of FY2-24-25. Noteworthily, six market experts are predicting the first rate cut in December 2024, including one with a mixed approach. Meanwhile, a rate cut in October policy is expected by almost five analysts.

Surprisingly, one of them suggests a 50 bps rate cut in H2 of FY25, while another hints at a 75 basis points cut. Overall, in FY25, most of them expect the repo rate to be at 6%, while two experts see the rate at 5.75% by the end of the financial year 2024-25.

Nayar said, "If the food inflation outlook turns favourable on the back of a normal distribution of rains in the second half of the monsoon season, and in the absence of global or domestic shocks, a stance change is possible in October 2024. This could be followed by a 25 bps rate cut each in December 2024 and February 2025, with an extended pause thereafter."

According to Ajit Kabi, Analyst - Banks & NBFCs of LKP Securities, who expects the withdrawal of the accommodative stance is likely to stay in the next bi-monthly meeting, said, "around 8% growth and above-trend inflation; we expect RBI to begin cutting rates unless concerns emerge about slowdown."

Kabi added, "We expect RBI's first repo rate cut would take place in Q4 2024. Rates would be 25 basis points lower at 6.25%."

Moreover, Abhishek Upadhyay, Founder, Of Power of Markets expects the status quo between July to September 2025, with two 25 bps cuts each in Q3FY25 and Q4FY25. Overall, he expects a repo rate at 6% in FY25.

In his rationale, Upadhyay said, "CPI in India: June 2024 came at 5.08%, May 24 CPI was at 4.75% & on April 24 it was at 4.83% continuously hovering around 5% not coming near to the RBI set target of 4%. So this is one of the key reasons I don't think the rate will change in this meeting."

On the growth front, Upadhyay said, "GDP growth looking attractive for FY24 GDP growth was at 8.2%. For Fy25 major global & domestic agencies projected around 6.8 to 7.5 & for FY26 GDP forecast can be around 6.5 to 7%."

In the case of bank liquidity, Upadhyay added "Liquidity in the banking system is appropriate, and can be actively managed by RBI."

RBI has kept the repo rate unchanged at 6.5% throughout FY24 till date, after hiking the key interest rate for a whopping 250 basis points between May 2022 to February 2023, as inflationary pressures mounted globally after the Russia-Ukraine war. Central banks globally including in India faced an uncomfortable situation of multi-year high inflation, which led to a series of aggressive rate hike trends.

However, RBI just like the US Federal Reserve has kept a wait-on-watch mode on its monetary policy, and reiterated the need to continue with the disinflationary stance until the durable alignment of the headline CPI inflation with the target is achieved.

RBI's policy decisions align 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.

The latest consumer price index (CPI) rose to a four-month high at 5.08% in June 2024, owing to a sharp spike in food prices. The latest print is below the market's estimates and was also the fastest surge since February 2024.

Notably, CPI inflation is below RBI's upper tolerance limit of 6% for the tenth consecutive month but is still above its medium target of 4%. The last time CPI inflation was below 4% was in September 2019. Since May 2022 till date, the lowest CPI print was 4.31% recorded in May 2023.

Apart from the policy repo rate, other key rates in RBI's policy are of SDF, MSF and bank rate.

In the June 2024 policy, RBI kept the 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%.