RBI Repo Rate: What Has Changed Since The Last Policy? 10 Key Points Checklist!

The six-member MPC meeting has commenced from October 4, and the monetary policy outcomes will be announced on Friday. Economists expect the MPC led by RBI governor Shaktikanta Das will continue to maintain a hawkish opinion by pausing the repo rate for fourth-consecutive policy at 6.5% along with no change in stance.

Bank of Baroda economist Sonal Badhan believes that RBI will keep liquidity tight to keep short-term rates higher and support INR. Liquidity tightening may also worsen close to election months.

She has ruled out any rate cuts this fiscal year, and anticipates the earliest possible rate cut in Q1FY25. Further, upward revision to RBI's CPI forecast for FY24 can be expected, by 10-20bps. However, GDP forecasts are anticipated to remain unchanged. She expects the 10-Year yield to trade in the range of 7.15-7.25% next month.

Also, a poll conducted between September 20-28 by GoodReturns showed that the RBI will maintain a status quo in rates for the fourth consecutive policy after aggressively hiking rates by 250 basis points cumulatively from May last year until February 2023.

Here are 10 key factors to note since the last policy as per Bank of Baroda economist:

1. Crude Oil Prices:

Since August 10, 2023, crude oil prices in the global market have averaged to $89/bbl, sitting above US$ 85/bbl factored into RBI estimates (Apr'23 policy briefing).

Badhan said, "Since early Sep'23 (8 Sep) prices have hovered above US$ 90/bbl. At the time of the last policy, prices oil prices averaged $ 79/bbl. This implies 12.6% jump in prices since the previous policy."

Key reasons behind the rapid surge in crude prices are -- tightened supplies due to US crude stockpiles and an extension in the production cut by major OPEC countries ahead of winter months, coupled with prospects of a soft landing of the US economy, and a pause in rate hike by major central bank which is expected to support oil demand.

2. Domestic inflation scenario:

India's latest CPI inflation print came better than expected by easing sharply to 6.83% in August 2023. The drastic decline in inflation is due to steep moderation in food inflation especially in vegetable prices. However, inflation still stays above RBI's tolerance limit of 2% to 6%.

BoB's economist pointed out that on the positive front, vegetable prices and core inflation have begun to soften. On the other hand, key upside risks persist owing to weak monsoon, pressure on sowing (particularly that of pulses), and recent build-up in oil prices.

She added, "Our previous study shows that a $10/bbl increase in oil prices, leads to 40-60bps increase in CPI. Since we expect Sep'23 CPI print to overshoot RBI's estimates, we expect RBI to revise its current inflation forecast from 5.4% for FY24 to ~5.5%."

3. Monsoon:

This season, so far (between June 1 to September 27, 2023), the country's southwest monsoon is 6% below LPA compared with last year.

Recently, IMD has stated that weak El Nino conditions over the equatorial Pacific region are prevailing which is expected to intensify in the later part of the year. Also, IMD has confirmed that the withdrawal of South West Monsoon has begun.

4. Sowing:

Overall, kharif sowing has seen an upside of a meagre 0.3% as of September 22, 2023, compared with last year. However, the performance has been varied. Badhan said, "The sown area of coarse cereal has improved owing to higher sowing for Bajra and Maize. Sown areas of rice and sugarcane have also advanced. However, pulses acreage continues to lag behind, led by Arhar and Urad. Moreover, sowing area for cotton, Jute and Mesta crops has also declined. This is expected to have impact on domestic food prices, and rural demand."

5. High-frequency indicators:

Overall, economic activity has shown a mixed performance. Badhan said, that while some of the indicators such as air passenger traffic, rail freight volumes, PV sales, tractor sales, and electricity demand have shown improvement in Q2 compared with Q1, other indicators such as services PMI are expected to remain broadly steady, while centre and states' tax collections, GST collections and toll collections have seen some easing.

Also, the economist highlighted that moderation in tax collections is mainly on the back of softening inflation, as these are nominal numbers. As economic activity remains broadly resilient, RBI will remain in wait-and-watch mode and we do not expect any changes to the central bank's GDP forecasts.

6. Banking sector growth:

Bank credit has continued to outperform deposits. The credit growth accelerated to 19.8% as of September 8, 2023, compared to 16.2% as of June 30, 2023. In Q2 so far, the credit to services sector has been driving growth, while credit to industry is seeing some moderation.

Meanwhile, deposit growth has also picked up momentum but at a slower pace, registering a 13.6% increase on 8 Sep 2023, compared with 12.9% growth as of June 2023, driven majorly by the withdrawal of Rs 2000 banknotes.

7. System liquidity:

In September 2023, on average, liquidity has remained in deficit so far at Rs 0.1 lakh crore, compared with a surplus of Rs 1.2 lakh crore in August 2023.

The economist said, "A part of the reason for pressure on liquidity in Sep'23 could have been due to advance tax payments and preparation for GST remittances. We expect RBI to maintain tight liquidity in the coming months as well, to maintain
pressure on short-term yields, which may in turn support INR. Thus we expect RBI to keep its stance- "withdrawal of accommodation"-unchanged in the Oct'23 policy."

8. GDP growth:

India's GDP growth came in at 7.8% in the first quarter of FY24. The majority of economists expect GDP growth to be in the range of 6% to 7% for India. RBI projected GDP to grow at 6.5% for the fiscal.

"We expect GDP growth to moderate to ~6.3% in FY24. Our slightly lower than RBI's 6.5% growth forecast is based on continued slowdown in Europe and China, weaker exports, and risks to rural demand on the back of weak monsoon activity this year. However, we do not expect RBI to revise its GDP forecast for the time being, as it may await final agriculture production estimates and data on festive spending before tweaking the numbers," she said.

9. Sovereign yields:

The 10-year GSec yields have zoomed by 10 bps and are currently trading around the 7.25% mark, compared with 7.15% since August 2023. According to the economist, the positive impact of the news of India's inclusion into JP Morgan's EM Government Bond index has been outweighed by news of a steep increase in international crude oil prices and hawkish commentary from the US Fed, which may keep the rate higher for longer.

10. Global Trends:

As per the Bank of Baroda's economist, at the recent Fed policy meeting, the central bank maintained its hawkish pause but indicated that there might be room for one more rate hike this year. US economic activity is showing mixed trends. While on one hand, new home sales, consumer confidence and mortgage applications are signalling a slowdown, on the other hand, revival in durable goods orders, initial jobless claims, and ISM services PMI index is hinting at resilience in economic growth.

She added that this has fuelled fears that the Fed may keep rates elevated for a longer period of time.

Apart from this, the BoE held rates steady in its last policy, while the ECB opted for a dovish hike. Investors are expecting the BoE to remain on pause and cut rates from next year, while the ECB will have to be watchful of the impact of higher oil prices on CPI, the economist said.

What to expect in the October 2023 policy?

Looking at the factors, Badhan said, "We believe that growth fundamentals still remain strong. Key uncertainty remains around the impact of weak monsoon on agriculture production. This has potential upside risks for food inflation and rural demand."

Under these conditions, the economists said, "we expect RBI to maintain status quo on rates and stance. We do not expect any significant announcement on liquidity front either. In terms of forecasts, RBI may revise its CPI forecast higher and await more information before changing its growth forecasts for FY24. We continue to believe that no rate cuts will be announced in FY24 and the earliest possibility for a cut is in Q1FY25. We also do not expect any change in stance of "withdrawal of accommodation" by RBI."

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.