RBI Policy
Soft GDP data puts MPC in tough spot, but no rate cut likely Fri
This story was originally published at 12:38 IST on 3 December 2024
Register to read our real-time news.Informist, Tuesday, Dec. 3, 2024
By Siddharth Upasani and Shubham Rana
NEW DELHI - The Reserve Bank of India is in a "tough spot" after the disastrous GDP data for Jul-Sept, but its Monetary Policy Committee is still expected to retain the policy repo rate at 6.50% this week for the 11th meeting in a row, according to an Informist poll of 25 economists, treasury officials, and fund managers.
The committee, which will begin its three-day meeting Wednesday and announce its decision at 1000 IST on Friday, was widely seen holding interest rates steady this week amid a sharp increase in headline retail inflation in September and October and hawkish comments by Governor Shaktikanta Das. However, pressure on India's rate-setters to ease financial conditions has ramped up after GDP data released Friday showed growth slid to a seven-quarter low of 5.4% in Jul-Sept, sharply lower than economists' expectations of 6.5% and the RBI's own forecast of 7.0%.
According to Motilal Oswal Financial Services economists Nikhil Gupta and Tanisha Ladha, while the slump in growth is not expected to lead to any rate action this week considering CPI inflation is above 6%, "the probability vis-a-vis a day ago (prior to Jul-Sept GDP data) has certainly risen. However, we think that February will certainly see a rate cut, provided the inflation comes off."
In October, only MPC external member Nagesh Kumar had voted to cut the repo rate by 25 basis points, with the majority calling for interest rates to be left unchanged. However, the decision to loosen the stance to neutral had sparked hopes of a rate cut this week, although they were quickly extinguished after CPI inflation rose sharply in September and October and Governor Das warned a rate cut at the current juncture would be risky and premature.
India's headline inflation rate surged to a 14-month high of 6.21% in October, having risen more than 250 bps in the space of just two months on the back of an unfavourable base effect in September and higher food prices in October. And economists see 6%-plus inflation being a hurdle the MPC can't cross this week.
"With the inflation target mandate being the major priority for the RBI, a breach of inflation above the upper tolerance band in October reduces the possibility of a repo rate cut in the December policy," noted Kaushik Das, Deutsche Bank's chief economist for India and South Asia. "Compared to our earlier forecast of the rate cut cycle starting from April, we now expect the RBI to deliver the first 25 bps rate cut in the February policy, followed by another 25 bps cut in the April policy."
RATE CUT ON TABLE
To be sure, a status quo on Friday is not guaranteed, with ANZ Research calling for an "insurance rate cut" of 25 bps "for the sake of downside growth risks while maintaining a neutral stance for the sake of inflation". Two other respondents see a quarter-percentage point reduction in the repo rate this week, while two others refused to rule out the possibility of the MPC cutting interest rates for the first time in four-and-a-half years.
Despite calls from some quarters of the government for lower interest rates in recent weeks, the finance ministry is not particularly perturbed by the bad GDP figure. Speaking to reporters Friday, Chief Economic Adviser V. Anantha Nageswaran said while the growth print was "disappointing", the situation is not "alarming" as the Jul-Sept data is not seen as the start of a trend of weak numbers. Private sector economists, too, think the MPC should not react in a knee-jerk manner, with the post-Budget February meeting widely seen as the start of the rate cut cycle.
"...given H2 (Oct-Mar) growth is expected to be better, and with high food inflation impinging on demand, RBI MPC shouldn't panic based on one quarter of poor economic data," ICICI Securities Primary Dealership said in a note on Sunday.
One area where the RBI, and not the MPC, is expected to act is liquidity, particularly with the committee having shifted to a neutral stance in October from withdrawal of accommodation. According to Soumya Kanti Ghosh, State Bank of India's group chief economic adviser, the RBI "needs to recalibrate its liquidity management strategy".
"While a cut in CRR (cash reserve ratio) would be a de facto option, the central bank in the past has expressed in no unambiguous terms that the use of headline CRR as a liquidity management tool may not be the ideal path," Ghosh said.
HSBC economists think the CRR could be reduced by 50 bps to 4.00% this week to counter the tightness in liquidity conditions that has occurred since October due to the RBI's huge interventions in the foreign exchange market and the usual festival season related currency leakages. ICICI Securities Primary Dealership's economists, meanwhile, see a two-step reduction of 50 bps in the CRR, starting with a 25 bps cut being announced this week as the way forward.
The following are expectations of respondents from this week's meeting of the Monetary Policy Committee:
| ORGANISATION | EXPECTATION THIS WEEK | EXPECTATION FROM FEB MPC MEET |
| Acuit Ratings & Research | Status quo | 25-50 bps repo rate cut possible |
| ANZ Research | 25 bps repo rate cut | -- |
| Barclays | Status quo | -- |
| BofA Securities | Status quo | 25 bps repo rate cut |
| Capital Economics | Status quo | Status quo |
| CSB Bank | 25 bps repo rate cut | -- |
| Deutsche Bank | Status quo | 25 bps repo rate cut |
| HDFC Bank | Status quo | Increased likelihood of repo rate cut |
| HSBC | Status quo | 25 bps repo rate cut |
| ICICI Bank | Status quo | Repo rate cut |
| ICICI Securities Primary Dealership | Status quo | 25 bps repo rate cut |
| ICRA | Status quo | Repo rate cut on the table |
| IDBI Bank | Status quo | 25 bps repo rate cut |
| IDFC First Bank | Repo rate cut on the table | -- |
| Motilal Oswal Financial Services | Status quo | Definite repo rate cut |
| MUFG Bank | Status quo | 25 bps repo rate cut |
| Nirmal Bang Insitutional Equities | Repo rate cut not ruled out | Repo rate cut almost certain |
| PNB Gilts | Status quo | 25 bps repo rate cut |
| Societe Generale | Status quo | Repo rate cut |
| Standard Chartered Bank | Status quo | 25 bps repo rate cut |
| State Bank of India | Status quo | Repo rate cut |
| STCI Primary Dealer | Status quo | 25 bps repo rate cut |
| Sundaram Mutual Fund | 25 bps repo rate cut | -- |
| Tata Mutual Fund | Status quo | Repo rate cut |
| Union Bank of India | Status quo | 25 bps repo rate cut |
End
US$1 = INR 84.75
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Vandana Hingorani
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