The Reserve Bank of India is expected to maintain an extended pause and cut the repo rate by 100 basis points in 2024, according to a Deutsche Bank report. 

The RBI has hiked the repo rate by 250 bps, while the Fed Funds rate has gone up by 500 bps.

In 2024, if the Fed Funds rate comes down by 200 bps, it would be logical to expect the RBI to deliver half of that magnitude in rate cuts or about 100bps easing, Kaushik Das, chief economist, India & South Asia, Deutsche Bank, said.

He opined that the RBI is unlikely to start the rate cutting cycle before the Fed, as the interest differential between the repo rate and the Fed Funds rate is close to all-time lows (currently 150bps, while the lowest spread was 125bps in June 2006, when the Fed Funds rate was at 5.25 per cent and the repo rate was at 6.50 per cent).

Liquidity tightness

Liquidity has tightened quite substantially over the last few months, with the Mumbai Interbank Offered Rate (MIBOR) currently quoting close to 6.90 per cent, 40 basis points above the policy repo rate of 6.50 per cent, per the report.

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This is almost equivalent to a rate hike, even with the RBI pausing in the April policy against expectations of a 25bps hike, it added. 

So, while RBI has preferred to keep the policy rate steady, tighter liquidity conditions in the money market have pushed effective short-term rates higher beyond the MSF (marginal standing facility) rate of 6.75 per cent, Das said.

The net durable liquidity surplus reduced to ₹55,700 crore by April 21 from close to ₹80,000 crore on April 7. Durable surplus liquidity was around ₹2.9-lakh crore at the beginning of this calendar year

“We expect the RBI to continue with term repo auctions, as per the February 2020 revised liquidity framework, which should help prevent excessive liquidity tightening on a persistent basis, but even then, we see a greater likelihood of short-term money market rates remaining above the repo rate of 6.50 per cent by 10-25bps,” Das said.

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Short-term rates

Given the effective tightening of short-term rates by more than 25bps, despite the repo rate being held steady at 6.50 per cent in the April policy, and assuming that April CPI inflation is likely to print below 5 per cent, he observed that there is no strong justification for the RBI to continue with further rate hikes.

“While a potential poor monsoon could pose a threat to the inflation trajectory in the future, we think rates are sufficiently high to anchor inflationary expectations and therefore any temporary spike in CPI will likely be seen through,” Das said.

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