With domestic inflationary pressures rising and the Indian economy in a relatively sweet spot compared to the advanced economies, the Monetary Policy Committee (MPC) may not be in a hurry to lower interest rates, according to ICRA Analytics.
The retail inflation rose to a four month high at 5.69 per cent in December 2023 against 5.55 per cent in November due to increase in prices of vegetables,fruits and pulses.
India’s GDP growth was strong at 7.7 per cent in the first half of FY24 and is expected to end the current fiscal with a GDP growth of about 7.3 per cent against 7.2 per cent a year ago.
After hiking repo rate by 250 basis points from May 2022 to February 2023 from 4 per cent to 6.50 per cent, the MPC has been on pause mode.
Inflation data on radar
“Bond yields, moving ahead, will be dictated as to what stance the Reserve Bank of India adopts in its upcoming monetary policy reviews.…Incoming inflation data will also be on the radar of the market participants,” said ICRA Analytics, which is a subsidiary of ICRA , in a report.
Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA , opined that rate cuts appear distant, and are unlikely to emerge before August 2024, with a stance change expected in the preceding policy meeting.
ICRA Analytics said the domestic debt market in the run up to the Union Budget and General Elections may witness volatility. Market participants will await as to whether the Union Government will come up with a populist budget or stick to the fiscal consolidation roadmap.
Yield on the 10-year benchmark Government Security (7.18 per cent GS 2033) remained unchanged at 7.18 per cent (as on January 12, 2024), same as that of December 29, 2023.
“On the global front, monetary policy action by key central banks across the globe and crude oil prices will also remain in sharp focus. India imports more than 80 per cent of its oil requirements and lower global crude oil prices is credit positive for the Indian economy.
“In addition to the above-mentioned factors, the movement of the rupee against the greenback and transaction trends by foreign institutional investors may also impact the domestic bond yield trajectory in the coming months,” ICRA Analytics said.