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Informist, Wednesday, Oct. 9, 2024

MUMBAI – Following is a compilation of first views of economists and market experts on the Reserve Bank of India's fourth bi-monthly monetary policy statement for 2024-25 (Apr-Mar) detailed on Wednesday:

BANKERS

ASHHISH VAIDYA, MANAGING DIRECTOR AND COUNTRY TREASURER, DBS BANK INDIA

The stance change was expected by the market, but some scepticism had crept in due to the geopolitical conflict in West Asia and China's fiscal stimulus. This seems to be in line with a global reversal of monetary policy to normal levels.

The MPC is likely to cut rates by 25 basis points in December, and then 50 bps in 2025. The length and quantum of the rate cycle will be heavily data-dependent, especially with the global environment being so volatile.

One thing I really want to drive home is that the risks to the Indian economy are climbing. Near-shoring, and other such movements, are bringing down cross-border trade. The softer trade environment is going to need monetary policy attention.

I'm moving my target for 10-year gilt yield by end of December down to 6.50% from 6.75% earlier. Global yields could remain elevated until the end of the month due to the Israel-Iran conflict, but then data will show that the growth scare is growing. Thereafter, fixed income FPI flows are going to be extremely positive even in the near-term, while equity FPI inflows are going to a longer-term positive cycle. 

(Aaryan Khanna)

V.R.C. REDDY, HEAD OF TREASURY, KARUR VYSYA BANK

The Reserve Bank of India has kept the repo rate unchanged and adjusted its policy stance to neutral, aligning with the prevailing liquidity conditions. Growth and inflation forecasts remain steady, reflecting the RBI's view that it is not in a hurry to cut rates. However, the RBI has also highlighted risks from adverse weather conditions and geopolitical developments. Overall, the policy outcome is well-balanced.

In terms of bond yields, they remain directionally positive, buoyed by continuous foreign institutional investment inflows and favourable demand-supply dynamics. The 10-year yields are expected to reach 6.60% by the end of the fiscal year, supported by rate cut anticipation.

(Ashna Mariam George)

ECONOMISTS

ECONOMISTS OF HDFC BANK

The RBI acknowledged the durable disinflationary trend underway although highlighting lingering domestic and global risks--signalling that future rate action would be data dependent. Given this, if conditions evolve favourably over the coming months, a December rate cut is not off the table.

The central bank recognised that inflation could jump in September as the favourable base effect fades but expects pressures to subside by Jan-Mar--particularly with healthy kharif sowing and expectation of a positive winter crop as well. In terms of risks, the RBI spoke about unexpected weather events and geopolitical tensions that continue to add to uncertainty about the inflation outlook. We are broadly in line with the RBI on the inflation trajectory. We believe that the RBI's forecasts seem optimistic at this stage and high frequency indicators suggest that Jul-Sept growth is likely to undershoot the RBI's estimate of 7%. We hold on to our growth forecast of 6.8% for 2024-25 (Apr-Mar).

The 10-year yield traded lower at 6.75% after the policy compared with its previous close of 6.806%. We expect the 10-year yield to trade in the range of 6.7-6.8% in the near-term and ease to 6.6-6.7% by the end of this fiscal year with the start of rate cutting cycle and a moderation in US yields. The rupee traded largely unchanged at 83.92 at the time of writing compared with the previous close of 83.96. Looking ahead, we expect the rupee to trade in a range of 83.70-84.10 over the coming months. 

(Christina Titus)

SIDDHARTHA SANYAL, CHIEF ECONOMIST AND HEAD OF RESEARCH, BANDHAN BANK

The status quo on the RBI's repo rate was no surprise. The MPC rightly decided to wait for critical incoming information related to geopolitical developments, important election results, commodity price trends and domestic growth-inflation dynamics in the coming months.

The change in stance to "neutral" after a more hawkish stance of "withdrawal of accommodation" for nearly two and half years is significant and appropriate. However, it should not be interpreted as a precursor to a cut in the repo rate necessarily in the next policy itself. MPC’s action will remain data dependent.

One expects the RBI to stay flexible and prudent in managing liquidity in the coming months without leaving any tool off the table. Growth in reserve money – the measure of primary liquidity infusion by the central bank into the banking system – fell sharply to a compounded annual growth rate of merely around 7% since mid-2022, in sharp contrast to a long-term growth rate of 12-15%. Reserve money growth will likely inch higher gradually in the coming months.

It was heartening that the RBI's communication following Wednesday's MPC meeting reiterated the central bank's nimble and nuanced approach towards managing the current macroeconomic situation. One feels that the RBI will remain open to supporting growth, if needed, without lowering its long-term commitment to combat inflation. 

(Vidhushi RajPurohit)

SHREYA SODHANI, REGIONAL ECONOMIST, BARCLAYS

The Reserve Bank of India's Monetary Policy Committee voted 5 votes to 1 to hold the repo rate at 6.50% as expected. The MPC, on the other hand, voted unanimously to change the stance to "neutral" from "withdrawal of accommodation" earlier, against our expectation that the stance would remain unchanged. 

We continue to expect a rate cut in December. We now expect the bank to cut rates three times in this cycle, by 75 basis points, compared with 50 bps earlier. All six members--including the until-now hawkish internal members--voting for a change in stance shows all are willing to, and see the need to, have the optionality, to act with a potentially quick change in outlook.

While forecasts remained unchanged for both growth and inflation--against market expectations--we think the change in communication offered hints. "Progress towards realising durable disinflation towards the target" and the change from significant caution to optimism on food inflation suggest that the bank's inflation forecast may be closer to ours, that is, 4.3%, but it is cautious of risks from uneven weather and geopolitical tensions. Indeed, we think forecasts for growth and inflation were kept unchanged in order to support the Committee's decision to keep rates on hold in the face of growing calls for cuts.

(Sourabh Kumar)

MADAN SABNAVIS, CHIEF ECONOMIST, BANK OF BARODA

The policy did surprise with a change in stance being unanimously passed. This does indicate that a rate cut will be in the offing in the future, provided the data turns out to be acceptable. Interestingly, the RBI has projected inflation at 4.8% for Oct-Dec, which is the highest for the four quarters this year. This gives a sense that the earliest that we can see a rate cut will be in February given the three major inflation risks highlighted by the governor--weather, geopolitics and global commodity prices. The fact that growth is on a stable path provides comfort that there is no urgent need to lower the rates at this point of time. 

(Christina Titus) 

ACHALA JETHMALANI, ECONOMIST, RBL BANK

The monetary policy outcome is broadly on expected lines. The pivot in the stance to neutral is seen paving the way for policy easing in the next six months. The MPC's assessment and outlook on inflation-growth suggest that a rate cut is around the corner. While we still expect the first repo rate cut to come through in February 2025, a 25-basis-point cut at the December policy cannot be entirely ruled out.

Of the three newly elected external members, Dr. Kumar voted for a 25-bps cut at this policy, suggesting that he is one of the doves on the panel. The pivot to cuts and pace of cuts is getting priced in, but domestic data and global developments need to be watched to time the first cut.

(Gowri Lakshmi)

GAURA SEN GUPTA, ECONOMIST, IDFC FIRST BANK

In line with expectations, the MPC voted to keep the RBI's repo rate unchanged at 6.50%. The policy stance was changed to neutral from the withdrawal of accommodation, against our expectation of no change. In the past, the policy stance was linked to future policy paths and delinked from liquidity conditions. The change in stance indicates that policy space to ease rates could open up if food inflation moderates as supplies improve. As per the RBI's inflation trajectory, food inflation pressures are expected to ease from Jan-Mar onwards, supported by expectations of good kharif and rabi crop output.

Policy focus remains on aligning inflation with the 4% target on a durable basis. Strong growth conditions provide policy space to remain focused on inflation. The RBI's assessment of growth remains positive with the 2024-25 (Apr-Mar) GDP growth estimate retained at 7.2%. Urban consumption is expected to be supported by service sector growth and rural demand is expected to be supported by a pickup in agricultural activity. The capital expenditure cycle remains supported by the government sector and the healthy balance sheets of corporates and banks. Government expenditure, which had slowed in Apr-Jun due to the General Elections, is expected to pick up pace in the remainder of the financial year.

Food inflation pressures are expected to reduce by Jan-Mar as supplies improve. Monsoon distribution has been overall favourable, which augurs well for kharif crop. Reservoir levels are tracking higher than the 10-year average, which is supportive for the rabi sowing. Core inflation, which remains near historical lows, is expected to remain contained as the transmission of past rate hikes takes place. The key risk to inflation remains from adverse weather events and the upside risk to global commodity prices from geopolitical escalation and further Chinese stimulus.

We maintain our call for a shallow RBI rate cut cycle starting from December, provided food inflation pressures ease in the coming months as supplies improve. Oct-Dec CPI inflation is expected to average near 5.0%, marginally higher than RBI's estimate of 4.8%. This is mainly due to adverse base effects and a month-on-month rise in food prices in September and October. Headline inflation is expected to ease from Jan-Mar onwards, with kharif and rabi output expected to be on the higher side.

The policy space to remain on pause and assess the durability of the disinflation process is provided by growth conditions holding up. Compared to the RBI, we remain more conservative on growth at between 6.5% to 7.0% in FY25 with some signs of moderation visible. High-frequency indicators for Jul-Sept for consumption are mixed for both urban and rural demand. 

(Vidhushi RajPurohit)

VIKRAM CHHABRA, SENIOR ECONOMIST, 360 ONE ASSET

The shift to a 'neutral' policy stance at the October Monetary Policy Committee meeting provides the Reserve Bank of India with the flexibility to cut rates when the data justify such an action. However, the Monetary Policy Committee added that it remains "unambiguously focused on the durable alignment of inflation with the target," signalling that inflation remains a top priority.

A good monsoon season, healthy kharif sowing, and high reservoir levels have considerably improved the inflation outlook. Meanwhile, in recent months, some key indicators like goods and services tax collections, core production, and Purchasing Managers' Indices have moderated. Therefore, we expect the RBI to initiate the rate cut cycle in the December or February policy meeting, assuming inflation evolves as anticipated. However, this will likely be a shallow rate cut cycle of 50-75 basis points. 

(Ashna Mariam George)

ARSH MOGRE, ECONOMIST, PRABHUDAS LILLADHER CAPITAL

The RBI's Monetary Policy Committee held the repo rate steady at 6.50% for the tenth consecutive meeting, reflecting a cautious, data-driven approach amidst a global easing trend. Shifting to a 'neutral' stance indicates flexibility but not readiness for immediate easing. Governor Shaktikanta Das's firm message is clear: any rate cut will be contingent on achieving a durable alignment of inflation to the 4% target--a critical threshold that remains elusive amid persistent food price volatility and global uncertainties.

The RBI's inflation forecast for FY25 was kept at 4.5%, but the upward revision in Q3 to 4.8% signals rising caution over the impact of erratic monsoon patterns and geopolitical tensions. While strong kharif sowing and high reservoir levels provide some relief, risks from La Nina and potential global supply shocks keep the inflation outlook precarious. On growth, the RBI's 2025-26 (Apr-Mar) GDP projection remains robust at 7.2%, supported by resilient private consumption and investment, though early signs of moderation are evident in manufacturing and credit activity.

This neutral stance is not a precursor to rate cuts but a strategic recalibration which is "a calculated wait-and-see approach", allowing the central bank to act swiftly if inflationary or growth dynamics shift sharply. Future cuts will likely be shallow, 50-75 basis points in FY25, starting from the December meeting if growth indicators continue to show weakness, reinforcing that every policy decision remains 'live' and meticulously data-driven. The RBI's stance is a clear signal: stability over stimulus, ensuring inflation is durably anchored before committing to a looser policy. 

(Srijita Bose)

MADHAVI ARORA, CHIEF ECONOMIST, EMKAY GLOBAL

The policy decision this time around was not easy, and was indeed tricky for the RBI to find a balance in its policy biases with so many moving pieces. The Monetary Policy Committee had a lot to process on the domestic and external front.

On the domestic front, the key concerns were-incipient weakness in growth indicators, demand led to the core disinflationary impulse despite noisy food dynamics but a still-elusive 4% inflation target, and easy financial conditions on net.

On the external front, the key events were fluidity of global narratives with global fears of re-ignition of a high for long scenario, amidst US Federal Reserve's massive 50-basis point cut in September, geopolitical stress and upcoming US election event risk which could materially disturb Asian foreign exchange dynamics, amid the ratcheting up of US-China trade war.

Thus, no rate action, in conjunction with stance change to neutral with stress on being 'actively disinflationary' is indeed their best bet to prep ground for the start of a shallow easing cycle, possibly but not necessarily from December.

The government security market has rejoiced at the stance change and this, in conjunction with the announcement of FTSE EMBI inclusion, has led to a 7 to 8 bps rally in the yield on the 7.10%, 2034 bond levels from Tuesday. The spread between the repo and the 10-year bond has now compressed to 25 bps. Any further rally would be capped till we actually see a commencement of the secular rate cut cycle.

(Siddhi Chauhan)

DHARMAKIRTI JOSHI, CHIEF ECONOMIST, CRISIL MARKET INTELLIGENCE AND ANALYTICS

The Monetary Policy Committee of the Reserve Bank of India adopted a 'neutral' stance but kept the policy rate unchanged. While this signals circumspection, it also underscores the likelihood of a rate cut in December. The outsized US Federal Reserve rate cut of 50 basis points in September marked complete and a decisive turn in monetary policy among major central banks. Yet, for emerging market peers, domestic inflation concerns are at the front and centre.

It is obvious that high food inflation is constraining Mint Road. To be sure, non-food inflation stayed significantly below trend at 2.3% in the first five months of the current fiscal (FY25). We anticipate a 25 bps reduction in the repo rate during the MPC's policy review meeting in December, in response to the expectation that food inflation will decline. We also expect GDP growth to moderate to 6.8% this fiscal compared with 7.2% forecasted by RBI for this year.

Agricultural output is expected to improve with rains favourable during the kharif season and prospects for the rabi season improving because of better water reservoir position. Globally, risks and uncertainties persist, with escalating tensions in the West Asia, weather uncertainties and outcome of US elections in focus. Reason why the RBI took a cautious approach and kept its powder dry. 

(Ashna Mariam George)

RAJANI SINHA, CHIEF ECONOMIST, CAREEDGE

With the change in stance, the MPC has given itself the flexibility to cut rates going forward, depending on how the domestic and global conditions pan out for CPI inflation. While the RBI governor indicated the comfort provided by surplus monsoon and healthy kharif harvest, he remained cautious of certain inflationary risks. Any adverse weather conditions, escalation of geopolitical conflicts and the recent sharp increase in commodity prices need to be monitored for the future inflation trajectory.

We feel that there are chances of a shallow rate cut of 25 basis points in the December policy, followed by another 25 basis points in the March policy, provided food inflation moderates. While the RBI remains optimistic on growth, some moderation in recent high frequency economic indicators like core sector, PMI manufacturing, GST collections, passenger car sales also give reason for the RBI to look at rate cuts going forward. Expectation of further rate cuts by major global central banks, including the US Federal Reserve, are also supportive of a rate cut by the RBI. 

(Vidhushi RajPurohit)

SHILAN SHAH, DEPUTY CHIEF EMERGING MARKETS ECONOMIST, CAPITAL ECONOMICS

The Reserve Bank of India's new-look MPC voted to keep the repo rate unchanged at 6.50% today as expected but struck a less hawkish tone in its communications, which included a change in the official policy stance to more neutral language. This strengthens our long-held conviction that the easing cycle will begin in December.

The entire panel agreed to change the official policy stance from being "focussed on the withdrawal of accommodation" to "focussed on the durable alignment of inflation to target while supporting growth." In other words, with the economy entering a softer patch, the panel wants to see further evidence that the recent drop in headline inflation to below the RBI’s 4% target will be sustained. Governor Shaktikanta Das noted that "headline inflation is on a downward trajectory, though its pace has been slow and uneven," and also noted that a near-term spike in food price inflation was likely in September. But beyond September there are good reasons to think that food price inflation will fall back. And with the economy cooling and household inflation expectations remaining low, core inflation will remain anchored too.

As such, we think the conditions will be in place for policy loosening to begin in the next MPC meeting in early December. We maintain our long-held forecast of a 25 bps cut in the repo rate in that meeting – the consensus is currently split between a cut and a hold but analysts are likely to make revisions over the coming weeks following today's communications.

(Kabir Sharma)

ADITI NAYAR, CHIEF ECONOMIST, ICRA

Today's MPC review prudently prioritised flexibility, by changing the stance to neutral, in line with our expectations. This has opened the door for a potential rate cut in December, if the lurking risks to inflation, both domestic and global, do not materialise. In our view, the Indian rate cut cycle will be fairly shallow, restricted to 50 basis points over two policy reviews.

(Cassandra Carvalho)

UPASNA BHARDWAJ, CHIEF ECONOMIST, KOTAK MAHINDRA BANK

The RBI's decision to hold rates while changing the stance to neutral is completely in line with our expectations. The tone of the RBI's Governor Shaktikanta Das remains fairly balanced, keeping further decisions data dependent. We continue to expect the onset of rate easing from December with a 25-basis-point cut, but the scale of easing in this cycle is expected to be shallow with limited scope for back-to-back easing in each policy. 

(Vidhushi RajPurohit)

FUND MANAGERS

SIDDHARTH CHAUDHARY, SENIOR FUND MANAGER-FIXED INCOME, BAJAJ FINSERV AMC

The change in stance to "neutral" from "withdrawal of accommodation" is an acceptance of the fact that barring a spike in the next couple of months due to base effects, inflation is expected to be subdued in coming quarters and that the high-frequency growth indicators are slowing. Even though the growth forecast has not been revised downwards, this change has created space for the RBI to cut rates in upcoming policies while maintaining the optionality as geopolitical risk remains elevated.

The above-normal rains during the southwest monsoon season point to good agricultural output. It should moderate food inflation significantly after a jump in inflation in the next couple of months due to a low base last year.

The US Federal Reserve's 50-basis-point cut has widened the rate differential with India and two more cuts expected by the Fed this year will create more headroom. This should ease some concerns about lower rates encouraging capital outflows. Overall, reasons are stacking up for rate cuts. 

(Gowri Lakshmi)

DEEPAK RAMARAJU, SENIOR FUND MANAGER, SHRIRAM ASSET MANAGEMENT CO

As expected, the RBI left the repo rate unchanged at 6.5%. The RBI stance, however, has changed to neutral, indicating that its primary focus is to balance growth and inflation.

Growth has been resilient and given the short-term pressure on inflation, RBI may continue to hold interest rates unchanged in the current quarter (Oct-Dec) and based on inflation moderating below 4.5% and moderation of geopolitical concerns, the RBI may undertake a rate cut decision in the last quarter of the current financial year.

The bond and equity markets are expected to react positively in the medium term. Though short-term biases of foreign institutional investors may continue towards Chinese markets keeping pressure on the equity markets, resilient domestic flows can defy deep corrections in the equity markets despite high valuations.

The markets may now trend positive with subsequent rate cuts by the US Fed. However, stock-specific corrections can be expected based on the earnings performance. Overall, in the short term, one can expect a buy-on-dip approach with a neutral stance by RBI.

(Sachi Pandey)

RAJEEV RADHAKRISHNAN, CHIEF INVESTMENT OFFICER - FIXED INCOME, SBI MUTUAL FUND

The evolving domestic growth inflation outlook clearly was apt for a change in the monetary policy stance to neutral. While remaining cognisant of emerging risks on the inflation outlook, the neutral stance provides more flexibility to address evolving macro dynamics. From a near term perspective, the policy focus would likely remain attuned to address the skewness in system liquidity and any potential financial stability risks. 

(Cassandra Carvalho)

OTHERS

RAHUL BAJORIA, HEAD OF INDIA ECONOMIC RESEARCH, BOFA SECURITIES INDIA

We see the RBI signalling its openness to a cut, but given rising geopolitical uncertainty, has chosen to wait. We expect a 25 basis points rate cut in December Monetary Policy Committee, and will watch growth and inflation indicators carefully in the next few weeks.

The governor's speech on Wednesday emphasised the need to unambiguously safeguard inflation expectations, which, despite falling core inflation, have stayed elevated. But we sense a greater balance between growth and inflation risks on the RBI's mind, leading to the shift in stance. This, in our view, is a way for the RBI to signal its openness to cut rates if needed, subject to last mile inflation target achievement in the next few quarters. As December Monetary Policy Committee approaches, the growth slowdown in India will become apparent, as inflation aligns itself to the 4% target. We expect repo rate cuts of 100 bps by December 2025, beginning December 2024. If rate cuts are delayed or smaller, downside risks to growth would rise.

We are seeing a slowdown in high frequency data, which, despite signs of improvement in rural consumption, may not be enough to offset the weakness in industrial data, which poses material downside risks to the RBI's GDP forecast of 7.0% for the second quarter of FY25. We continue to project GDP growth at 6.8% for FY25, with risks balanced, as incoming data has been weak, but falling input prices can provide some relief in the second quarter of FY25.

On inflation, the RBI maintained its projections at 4.5%, despite the improvement in agriculture production, and falling energy prices. Still, the preconditions for policy easing, i.e. headline and core inflation aligning to 4%, supply shocks appearing benign, and credit conditions tightening, are on track to being met. Despite inflation likely rising in September, we see real rates staying elevated for an extended period, and headline inflation is closest to the inflation target it has been in almost twenty-two quarters (on a four-quarter rolling basis).

(Ashna Mariam George)

RAHUL BHUSKUTE, CHIEF INVESTMENT OFFICER, BHARTI AXA LIFE INSURANCE

The decision of the Reserve Bank of India to keep policy repo rate unchanged while changing stance to 'neutral' was a surprise to some of the market participants, and as such the bond yields are lower by around 5 basis points post the announcement. But in our understanding, this was the most logical step, with domestic growth conditions also slowing down a bit and inflation being well under control.

However, given the geopolitical uncertainties, we believe the RBI would want to be data dependent going forward and hence the ‘neutral’ stance. We also see a good chance that both RBI’s growth projection of 7.2% and CPI projection of 4.5% will undershoot in this financial year and hence rate cuts are likely to come by starting December. Also, another positive development for the Indian bond market which materialised Wednesday was the FTSE Russell Emerging Markets index inclusion with estimates of $4-5 billion inflows starting September 2025.

(Ashna Mariam George)

End

Compiled by Vinodini Yadav

Filed by Ashish Shirke

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