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  • MPC keeps repo rate unchanged at its 1st meeting of FY25

    MPC keeps repo rate unchanged at its 1st meeting of FY25

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    RBI Governor Shaktikanta Das addresses during a press conference regarding the monetary policy decisions, in Mumbai on Friday
    | Photo Credit:
    ANI

    The RBI’s rate setting panel, as was widely anticipated, stood pat on the policy repo rate in its first meeting of FY25 on Friday to ensure that volatile food prices don’t impede the ongoing disinflation process and retail inflation aligns with its 4 per cent target.

    Governor Shaktikanta Das emphasised that the elephant (retail inflation), which has now gone out for a walk and appears to be returning to the forest, has to return to the forest and remain there on a durable basis. He said that though inflation has come down significantly, it remains above the 4 per cent target

    Monetary Policy Committee (MPC) members decided by a 5 to 1 majority to keep the policy repo rate (the interest rate at which banks borrow funds from RBI to overcome short-term mismatches) unchanged at 6.50 per cent. MPC had maintained status quo on repo rate in all six meetings in FY24.

    The members also decided by a similar majority to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

    Das underscored that “It is essential, in the best interest of the economy, that CPI inflation (which eased to 5.1 per cent during January and February 2024 from 5.7 per cent in December 2023) continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished.”

    Keeping vigil

    Looking ahead, the Governor observed that robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4 per cent.

    “As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation.

    “Under these circumstances, monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions,” Das said.

    The Governor cautioned that high and persistent food inflation could unhinge anchoring of inflation expectations which is underway. Frequent and overlapping adverse climate shocks pose key upside risks to the outlook on international and domestic food prices, he added.

    “The success in the disinflation process so far should not distract us from the vulnerability of the inflation trajectory to the frequent incidence of supply side shocks. Our effort is to ensure price stability on an enduring basis, paving the way for a sustained period of high growth,” the Governor said.

    Rates cuts expected from Oct

    Referring to RBI retaining its FY25 retail inflation projection at 4.50 per cent, SBI Chief Economic Adviser Soumya Kanti Ghosh opined that the outlook for inflation will largely be shaped by food price uncertainties (indications of a normal monsoon on one side while increasing incidence of climate shocks on other side).

    “The good thing, however, is that with 4 per cent inflation target in FY26, the RBI is possibly guiding the market with a prolonged rate cut cycle.

    “…We expect a series of rate cuts beginning October 2024, followed by another in December 2024 and possibly in February 2025. The stance change can happen in October itself,” Ghosh said.

    Abheek Barua, Chief Economist and Executive Vice-President, HDFC Bank, observed that given the recent global resilience in economic activity, there has been a tendency to keep monetary policy tight to take on the last mile challenge on inflation by global central banks. The RBI seems to be moving in lock step with that.

    “Despite its emphasis that inflation is moderating, the RBI kept its policy rate and stance unchanged in today’s policy announcement. The central bank remained optimistic on growth – pegging it (retained) at 7 per cent for FY25 – and said this provides space for monetary policy to remain tight and focus on inflation. Consequently, the chances of a rate cut have been pushed forward into the second half of FY25,” he said.

    Inflationary pressure

    Crisil’s Chief Economist Dharmakirti Joshi and Senior Economist Pankhuri Tandon observed that the MPC’s ‘inaction” was expected, as food inflation has been stubbornly high so far, even as core inflation – a better indicator of demand pressures – continues to trend down.

    “We expect easing food inflation, coupled with benign non-food inflation, to bring headline CPI inflation to 4.5 per cent in this fiscal, under our base case – this is close to the RBI’s target of 4 per cent. That said, any weather disruptions and sustained uptick in crude oil prices will remain monitorable.

    “The transmission impact of rate hikes since May 2022 and regulatory measures on risky lending are still playing out. This, coupled with fiscal consolidation, could lead to some moderation in GDP growth this fiscal,” they said.

    Overall, the macroeconomic environment is likely to turn favourable for a rate cut by mid-2024, under Crisil’s base case, lest oil prices and monsoons play a spoilsport.

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  • RBI likely to hold repo rate at 6.50%

    RBI likely to hold repo rate at 6.50%

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    With the Reserve Bank of India (RBI) fixated on aligning retail inflation with the four per cent target, majority of the members of its rate setting panel are expected to vote to hold the repo rate at 6.50 per cent at their first meeting in the new financial year, scheduled from April 3 to 5.

    The repo rate, which is the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches, was left unchanged in all six bi-monthly monetary policy reviews in FY24 as retail inflation stayed above the monetary policy committee’s four per cent target.

    This rate was last increased from 6.25 per cent to 6.50 per cent in February 2023.

    While a majority of the economists expect the ‘withdrawal of accommodation’ stance to continue to ensure transmission of the 250 basis points repo rate hike effected between May 2022 and February 2023, some see the possibility of a surprise change in stance to ‘neutral’ to prepare the runway for rate cuts towards the middle of the new financial year.

    In his last monetary policy statement, RBI Governor Shaktikanta Das observed that the job (of bringing down inflation) is not yet finished, and the central bank needs to be vigilant about new supply shocks that may undo the progress made so far.

    He emphasised that monetary policy has to remain vigilant to ensure that the central bank successfully navigates the last mile of disinflation.

    “With the policy repo rate remaining on hold at 6.50 per cent for more than a year, the main focus has been on liquidity management and the evolution of “effective interest rate” in money markets.

    “Both repo rate and stance are likely to remain unchanged under base case scenario; but can’t rule out the possibility of a change of stance to neutral, given past evidence of the central bank surprising with its decision, particularly in April,” said Kaushik Das, chief economist, India & South Asia, Deutsche Bank.

    CARE Rating Economists said the RBI is expected to maintain status quo on both rates and stance in its upcoming policy meeting. They see the RBI opting for a shallow rate cut cycle of 50 basis points starting Q3 (October-December) FY25.

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  • RBI may hike repo rate by 25 bps

    RBI may hike repo rate by 25 bps

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    A majority of the financial sector experts expect the Monetary Policy Committee (MPC) to settle for a moderate repo rate hike of 25 basis points in its policy review meeting this week. .

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    The MPC will start its three-day deliberations on the next set of monetary policy on Monday and the decision will be announced on February 8.

    Reserve Bank of India Governor Shaktikanta Das, in his last bi-monthly monetary policy statement on December 7, had underscored that: “Core inflation is exhibiting stickiness. While headline inflation may ease through the rest of the year and Q1 (April-June):2023-24, it is expected to rule above the target. On balance, the MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects. ”

    Referring to the aforementioned statement, experts are of the view that MPC may go for one more rate hike to ensure that inflation remains within the target (4 per cent +/- 2 per cent).

    However, some are of the view that MPC may press the pause button. They cited the latest retail inflation and IIP readings to buttress their case.

    Bank of Baroda’s economists, in a report, said: “Going ahead, the overall liquidity situation needs to be tracked as surpluses have dwindled to a near neutral state. The RBI policy will be watched in this regard.

    “The MPC would persist with another rate hike to bring the repo rate to 6.5 per cent for this cycle before a pause.”

    The MPC has hiked repo rate (the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches) cumulatively by 225 basis points (from 4 per cent to 6.25 per cent) in FY23 so far.

    The MPC last hiked the repo rate by 35 basis points from 5.90 per cent to 6.25 per cent on December 7 th. Prior to that (on September 30, 2022), the committee had raised the repo rate by 50 basis points, from 5.40 per cent to 5.90 per cent..

    Kotak Securities, in a report, said that the global inflation environment is gradually turning benign although inflation is still well above every central bank’s target. Inflation will likely moderate further in the next few months, leading to the end of the rate hiking cycle by first half of Calendar Year (CY) 23 and possible rate cuts in late-2023/early-2024.

    “However, given large global uncertainties, central banks’ levers for supporting growth through monetary easing remain limited, thereby risking higher rates for an extended period.

    “We expect the RBI MPC to hike policy rate by 25 bps to 6.5 per cent, followed by a prolonged wait-and-watch approach, as it assesses the lagged impact of monetary tightening on growth and inflation,” the report said.

    Pause at the next meeting?

    Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC, observed that inflation has come down substantially over the last three months and is showing further downward momentum. External conditions have also eased with slower rate hikes in the US.

    RBI’s foreign exchange reserves have also increased over the last few months.

    Given these developments, MPC is expected to pause the rate hiking cycle in the February meeting and will maintain the repo rate at 6.25 per cent for an extended period, emphasised Pathak.

    “It might also change the policy stance to Neutral (from the current ‘withdrawal of accommodation’ stance). Bond market should react positively. We expect bond yields to go down gradually though elevated bond supply will limit the downside of yields,” he said.

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    BL Mumbai Bureau

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  • GDP growth Q2 FY23: How Indian economy is likely to perform; what to expect

    GDP growth Q2 FY23: How Indian economy is likely to perform; what to expect

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    GDP data for Q2: India’s gross domestic product (GDP) data for Q2 (July-September) 2022-23 is scheduled to be out on Wednesday. Analysts and economists have predicted that the GDP growth would be in the range of 5.8 per cent to 7.2 per cent in the second quarter, which will be lower than Q1 numbers. The GDP growth was 13.5 per cent in Q1 (April-June period) of the current fiscal (2022-23).  

    Analysts and experts have revised the GDP Q2 expectations due to global economic headwinds, geopolitical tensions, a stronger dollar, and tough financial conditions in many countries.  

    Let’s take a look at what experts predicted for Q2 FY23:  

    SBI Research 

    SBI Research said that India’s GDP growth for the second quarter would be at 5.8 per cent, down 30 basis points from average estimates, mainly due to the weak manufacturing sector with the steep margin compression. 

    In a report released on Monday, Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India, said that corporate results, operating profit of companies, excluding the banking and financial sector, slipped by 14 per cent in Q2 FY23 as against 35 per cent growth in last year same quarter (Q2 FY22). The top line reported a healthy growth. Net sales grew by 28 per cent, while bottom-line (profit) was down by around 23 per cent from the year-ago period. 

    He noted that there are several indicators that point out that the economy has been making resilient progress since Q2 despite global economic challenges, high inflation, recession fears, and weakening world trade. 

    Reserve Bank of India 

    The Reserve Bank of India has predicted that India’s GDP would grow 6.3 per cent in the April-September 2022 quarter. While hiking the repo rate in September, Governor Shaktikanta Das pointed that the economy is facing headwinds due to geopolitical tensions, tightening global financial conditions and decline in demand and global trade which can lead to degrowth. 

    Watch: India’s GDP Q2 data to be out today: What to expect?

    S&P Global Ratings  

    S&P Global Ratings has cut India’s GDP Q2 growth forecast to 7 per cent. But it noted that India’s economy and domestic demand will be less impacted by the global slowdown or recession fears in the western countries. 

    S&P had in September projected the Indian economy to grow 7.3 per cent in 2022-23 and 6.5 per cent in next fiscal year (2023-24). 

    Crisil 

    Rating agency CRISIL revised down its forecast for GDP growth to 7 per cent for FY2023 from 7.3 per cent, after taking into account the global slowdown, which has started to impact exports and industrial activity. This will test the resilience of domestic demand. 

    The rating agency expects India’s GDP to grow at 7 per cent in the Q2 FY23. Chief economist D K Joshi noted that the domestic demand is still supportive, mostly due to government capex, relatively accommodative financial conditions, and overall normal monsoons for the fourth time in a row. 

    ICRA  

    In its report, ICRA has said GDP growth will be around 8 per cent in Q2 as compared to 3.8 per cent seen in the previous quarter. The agency estimates the sectoral growth in Q2 to be driven by the services sector (9.4 per cent), with a subdued trend foreseen for the industry (2 per cent), and agriculture, forestry, and fishing (2.5 per cent). 

    ICRA’s Chief Economist Aditi Nayar said that a 6.5 per cent growth in Q2 of the current fiscal is expected, which is nearly half of the year-ago quarter when the economy had clipped at 12.7 per cent. 

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