The Reserve Bank of India’s Monetary Policy Committee (MPC) may prefer to keep the policy repo rate unchanged at their forthcoming meeting as the escalating Iran-Israel conflict could pose inflationary risks due to higher crude oil prices even as growth remains steady.
However, there is a possibility of the stance being changed from “withdrawal of accommodation” to “neutral” as a precursor to a likely rate cut in MPC’s December 2024 bi-monthly monetary policy review, say experts.
While the retail inflation readings in the last two months – July (3.6 per cent) and August (3.7 per cent) – have come in below the RBI’s 4 per cent target, it is cold comfort for MPC members as food price risk remains a contingent risk.
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Growth outlook
Though real GDP growth softened to 6.7 per cent in the first quarter (Q1) FY25 (due to contraction in government final consumption expenditure ahead of the general elections) against 8.2 per cent in the year ago quarter and 7.8 per cent in the preceding quarter, RBI’s real GDP growth projection for FY25 is currently at 7.2 per cent.
“This growth outlook reflects the underlying strength of India’s macro-fundamentals, with domestic drivers – private consumption and investment – playing a major role. Moreover, the growth trajectory is supported by an environment of macroeconomic and financial stability,” Governor Shaktikanta Das said in a speech last month.
The MPC is scheduled to meet from October 7 to 9. The committee was recently reconstituted with the induction of three new external members -- Ram Singh, Director, Delhi School of Economics, University of Delhi; Saugata Bhattacharya, Senior Fellow, Centre for Policy Research; and Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development.
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Rahul Bajoria, India & ASEAN Economist, BofA Securities (BofAS) India, said the central bank is set to remain on hold, for the tenth consecutive MPC meeting, keeping repo rate at 6.50 per cent.
“Incoming near-term data is much more mixed, and growth risks appear tilted to the downside, in our view. It is possible, that the RBI may also signal greater data dependence going ahead, as real rates remain elevated, and headline inflation is closest to the inflation target it has been in almost twenty-two quarters (on a 4-quarter rolling basis).
“This opens up the possibility of a shift in stance to neutral as well, if the RBI wants to entertain the idea of a rate cut. The upcoming meeting will have three new MPC members joining the MPC who do not seem to have a strong bias and may agree with RBI’s house view for some time,” Bajoria said.
The BofAS Economist opined that slowing growth and falling inflation offer room for the RBI to cut rates in coming months. He expects repo rate cuts totalling 100 basis points by December 2025, beginning December 2024.
Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA, observed that given the undershooting in the initial Q1 GDP growth relative to the MPC’s forecast, and the likely sizeable undershooting in the Q2 CPI inflation print as well, a stance change to neutral may be appropriate in the October 2024 policy review.
Geopolitical risks
“This could be followed by a shallow rate cutting cycle of 25 bps each in December 2024 and February 2025. The abundant monsoon offers some insurance for crop inflation. The impact of global political developments and geopolitical uncertainty on the growth inflation dynamics remains a risk,” she said.
Madan Sabnavis, Chief Economist, Bank of Baroda, observed that the potential for a status quo on the policy repo rate and the stance has gone up because of the Iran-Israel conflict.
“Members on the fence might also vote for a status quo, preferring to wait for one more policy. Any way there is no issue with growth. We all know that retail inflation is going up,” he said.