RBI Policy: Why Central Bank Will Not Cut Rates On December 8, And Still Show Signs Of Hawkish?

Inflation has cooled and stayed with RBI's upper tolerance limit for the second consecutive month, and the country's GDP growth rate has surpassed the central bank's quarterly estimates for the second time in a row. Yet the majority of the consensus is that RBI may continue to hold rates on December 8th for the fifth consecutive time policy in the current fiscal. However, many analysts and economists also expect RBI to continue on its hawkish tone, a layer milder than before. Many expect it's too soon for RBI to hint at a dovish stance.

RBI has maintained the status quo since the start of FY24. India's repo rate under the liquidity adjustment facility (LAF) remains unchanged at 6.50% for the fourth time in a row. Subsequently, 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%. Meanwhile, MPC has also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.

The central bank has been on a wait-and-watch mode to observe the rate hike impacts on the economy and businesses. After Russia invaded Ukraine in early 2022, RBI including other central banks went for aggressive hiking in interest rates to tame extreme inflation pressure. From May 2022 to February 2023, RBI has hiked the repo rate by 250 bps.

At present, India's consumer price index (CPI) inflation dropped to its lowest in four months 4.87% in October 2023 owing to a decline in various product categories. The country's real GDP growth comes to around 7.6% in the second quarter of FY24, stronger than the street's estimates of 6.8%. The latest economic print also surpassed RBI's Q2 target of 6.5% for the second consecutive quarter. Experts believe that the economy is yet to reflect the impact of the latest rate hike cycle.

During the October 2023 policy, RBI projected CPI at 5.6% in Q3FY24 and 5.2% in Q4FY24, while for the entire fiscal, it estimated a 5.4% CPI rate. In the case of GDP, RBI has projected a growth rate of 6% by Q3 and 5.7% by Q4, while the overall financial year projection is set at 6.5%.

Here's what to expect from RBI on December 8.

Shreyansh Shah, Research Analyst, StoxBox

Amidst the better-than-expected economic performance in H1FY24, led by an upward surprise in Q2FY24 GDP growth and inflation staying in the comfort zone, we believe that the RBI will keep the key interest rate unchanged in tomorrow's MPC meeting. With the recent RBI circular on the increase in the bank's Risk Weight Assets (RWAs), we are of the opinion that the central bank will focus on liquidity management and credit growth. After the recent strong GDP growth numbers in Q2FY24, we foresee a marginal upward revision in the FY24 GDP growth forecast corroborated by the government's commitment to capital expenditure. Also, a key pointer in the meeting would be the Governor's comments on any signs of green shoots in the rural economy.

Although there has been an improvement in the headline inflation which moderated from 7.4% in July to 4.9% in October, an uneven monsoon may cause some volatility in food prices, which may result in some uptick in the headline inflation in the coming months. With the high cost of borrowing impacting the affordable housing demand, we believe that the Governor may remark on measures to be taken in this segment. In the current scenario, we believe that the RBI will retain its withdrawal of accommodation stance, ensuring that it sustains economic growth and is watchful of inflation.

Dr. Manoranjan Sharma, Chief Economist, Infomerics Ratings

The MPC is likely to go in for unchanged benchmark policy rates on Dec , 8, 2023. This Policy would be announced against the backdrop of mixed macroeconomic and global canvas. Positive cues included unchanged Fed Reserve policy in the range of 5.25 % to 5.50 % for the second time on Nov.2, 2023, average crude price at below $85 per barrel for 8 months up to Nov, CPI inflation dropping from 5.02 % in Sept 2023 to 4.87 % in Oct., comfortable foreign exchange reserves of $ 600 billions and current account deficit (CAD) at 1.1 % of GDP in April -June 2023. There has been a robust GDP growth of 7.6 % on top of 7.8 % in Q1. This growth was spearheaded by manufacturing sector growth of 13.9 % over last year. The fiscal deficit has been restricted at 45% of the targeted estimates of April/Sept 2023 on surging direct and indirect taxes. Tailwinds also include corporate profitability and investments.

Liquidity manifested by net LAF remained in deficit with the current system liquidity deficit at Rs. 0.5 lakh crores and an average of 0.7 lakh crores in Nov. 2023. However, with govt surplus cash balances rising to an average of Rs. 3.7 lakh crores in Nov 2023, durable/ core liquidity surplus rose to Rs. 3 lakh crores. To place matters in perspective, we must, however, also consider the base effect in the growth process, the non realisation of the full potential of private investment, a spike in personal loans, higher logistics cost vis-a-vis other countries, moderation in the services sector and heightened geopolitical tensions post the Russia- Ukraine war and more recently the Israeli- Hamas war.

Hence, taking an overall view of the global and domestic environment, we don't see a change in the forthcoming RBI's Policy in terms of key benchmark rates.
We also see the stance of the policy to be retained as the withdrawal of accommodation".

Vaibhav Shah, Fund Manager, Torus ORO PMS.

Macro factors on the domestic front look favourable which may support the overall economy to continue its growth trajectory and thus RBI will keep its growth outlook intact. In terms of policy, inflation has shown signs of moderation and with inflation cooling off globally, we believe India's inflation will move into a comfortable zone. However with evolving global factors related to higher crude prices and bottoming out in metals along with mixed data coming out of the US along with the rising expectation of Fed pivot, we believe that RBI will maintain a status quo with the withdrawal of accommodation stance maintained.

Amit Goel, Chief Global Strategist at Pace360

The RBI is likely to deliver a dovish hold in the MPC meet on 8th December.

- Inflationary pressures that look set to persist in the near term argue against easing. Growth that's been beating expectations also takes a rate cut off the table, for now.

- We expect the monetary policy committee to vote unanimously to keep the repo rate at 6.5% for a fifth straight meeting.

- We see the RBI maintaining its accommodation withdrawal stance through the first quarter of next year to guard against lingering price pressures and potential rupee weakness. We expect it to pivot in April and kick off a series of rate cuts.

- The RBI is likely to note the better-than-expected GDP outcomes this year and raise its forecast for the year through March 2024, up from 6.5%.

- The central bank is likely to roll back hawkish signals it made at the October review about future sales of bonds. We expect the RBI to signal a delay in its plans to sell bonds in a bid to guide yields back down with a recent drop in global yields.

Umesh Revankar, Executive Vice Chairman, Shriram Finance

"The RBI's 'State of the Economy' monthly bulletin for November acknowledged the robust festival-driven demand and positive consumer sentiment. It also mentioned the decline of inflation to 4.7% in October. These statements have kindled hope of a return to the declining rates regime. However, recently, the RBI raised risk weights on consumer credit, credit card receivables, and NBFC exposure, by 25 percentage points up to 125% ostensibly to control the liquidity in the system. It clearly indicates that the financial regulator, rightly so, is in no mood to let its guard down on inflation. However, these measures do have an impact on MSME on-lending by NBFC's putting breaks on credit growth temporarily.

While the inflation numbers over the last few quarters have been encouraging, we agree with the RBI's view that our economy is still not out of the woods. Accordingly, we expect the MPC to maintain the repo rate at 6.5% as it aims to stabilise inflation around the 4% medium-term target by controlling the liquidity in the system. We further anticipate no rate cuts till the beginning of the next fiscal year."

Vikrant Mehta, Head - Fixed Income, ITI AMC

The RBI MPC meeting later this week is expected to be a non-event from the policy rate perspective as the Central Bank is predicted to keep the repo rate unchanged for the fifth meeting in a row. While we do not expect the RBI to indicate a "dovish hold" in this meeting, we do expect the Central Bank to tone down its hawkishness as the global environment is less hostile as compared to the previous policy review in October 2023. Additionally, markets will eagerly watch for cues on liquidity management and RBI open market operations.

Mandar Pitale, Head- Treasury, SBM Bank India.

Overall data prints released after October MPC are supportive for MPC to continue with its current "withdrawal of accommodation" stance. MPC is also likely to maintain the status quo on rates in the forthcoming policy announcement.

The present liquidity dynamic prevailing in the market is governed by shallowness in the systemic liquidity with the overnight rates hovering near the upper band of the policy rate corridor (MSF) supporting effective transmission of the past rate actions. The average monthly liquidity absorption for the last 2 months is well below INR 1 Lac crore. Since the present liquidity equation is expected to continue for the foreseeable future, RBI may not be required to resort to structural liquidity suction tools such as OMO sales in the coming months.

Forward guidance on inflation, comments on the behaviour of systemic liquidity going ahead as well as any explanation on not using the structural liquidity tools such as OMO Sales as touched upon in the previous MPC will be keenly watched by the market participants.

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