MPC Meet : Why RBI is unlikely to change stance or interest rates

MPC Meet

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MPC Meet : As this is the first meeting of a new financial year and with elections around the corner, the chances of rate or stance changes are unlikely. If there is any indication of a change in stance, it could also be an indication of rate cuts down the line

MPC Meet : The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting is likely to maintain the current status quo on both interest rates and policy stance. Here’s a breakdown of the reasons why:

Inflation Concerns:

  • Stubborn Inflation: While some categories show a slight decline, overall inflation remains above the RBI’s target of 4%. Food price volatility continues to be a concern.
  • External Factors: Adverse weather conditions could potentially impact agricultural output and push food prices further. MPC Meet

Growth and Stability:

  • Strong Growth: India’s economic growth is expected to remain robust, and the RBI might want to avoid hindering that momentum with rate cuts.
  • Cautious Approach: The RBI is likely mirroring the cautious stance of central banks in developed economies, who are themselves hesitant to cut rates yet. MPC Meet

Policy Stance:

  • Withdrawal of Accommodation: The RBI might maintain its current stance of withdrawing the accommodative monetary policy implemented during the pandemic. Changing the stance to “neutral” could signal an upcoming rate cut, which they might want to avoid for now. MPC Meet

Market Expectations:

  • Economists’ Predictions: Most economists expect the RBI to hold rates and maintain its current stance. There might be a possibility of rate cuts later in the year, but not in this meeting. MPC Meet

Overall, the RBI prioritizes controlling inflation while supporting economic growth. This cautious approach suggests they’ll likely wait for clearer signs of falling inflation or a significant slowdown before considering rate cuts or a shift in policy stance. MPC Meet

With monetary policy a tossup between growth and inflation, the recent economic good news (8.4 percent GDP growth in Q32024) would have enthused RBI to be upbeat about growth. It has in fact upped its nowcast GDP growth for Q4-2023-24 to 7.2 percent and 7.4 percent for 2024-25 and even other international agencies are revising their estimates upwards. But inflation stubbornly remains above the RBI’s target of 4 percent rate. Headline inflation has been at 5.1 percent in February 2024 while core inflation eased down to 3.4 percent, but food inflation worryingly rose to 7.8 percent in February from 7.6 percent earlier. MPC Meet

With adverse heat conditions predicted, agriculture output and food prices can be problematic and therefore it is unlikely the RBI is going to reduce policy rates any time soon, especially if it feels the growth concern is out of the way. But it will also be aware that besides monetary policy, it took a host of other measures such as cuts in excise duty on petrol and diesel, reduction in import duties on key raw materials and crude edible oils to moderate inflation. The most recent ones include reduction of petrol, diesel and LPG prices which will also surely work through the system. MPC Meet

Highs and Lows of GDP Growth

The fact that GDP growth was led by manufacturing (on the supply side) and investment on the expenditure side, may suggest, in hindsight, that high cost of capital did not matter. But on the flip side, the low growth in personal consumption, GDP’s largest driver, has been a huge cause of concern. Here again, it is believed to be coming mainly from rural distress and high inflation which may not relate directly to high interest rates. Nevertheless, the calls to boost consumption spending will invariably have to come through rate cuts. But the cost of credit narrative itself seems a little shaky here. For one, overall credit still grew by 13 percent till Jan MPC Meet

2024 (excluding the HDFC merger effect) which, though lower compared to previous year, seemed to belie the notion of higher interest rates dampening credit demand (a 250 bp hike in the previous year). In fact, credit card debt and unsecured persona

l consumption loans have continued to record high growth in spite of the RBI’s regulatory clampdown and increased cost of credit. Second, credit demand by industry was tepid, growing only at 7.8 percent (infrastructure credit even lower at 6 percent). This was not due to high lending rates but due to sluggish investment demand. Low credit offtake is especially puzzling when viewed against the high PMI numbers and strong manufacturing performance in GDP. MPC Meet

With this being the first meeting of a new financial year and with elections around the corner, neither rate nor stance changes are likely. If there is any indication of a change in stance to neutral from the present tight policy, it could also be an indication of rate cuts down the line

but that would again depend on a bunch of unknowns- weather, rainfall, the US Fed policy actions and possibly even the outcome of the elections, making it hard to predict. The comfort of sustainable GDP growth itself rests on a few fragile assumptions which can change and upset the estimates such as if manufacturing’s stellar show in Q3 turns out to be a flash in the pan, if trade deficits go out of control due to a surge in oil prices or a decline in exports, or if personal consumption continues to flag. MPC Meet

Interest rate policy will also be watched keenly by another segment viz. bank depositors. The year saw banks scrambling for deposits due to tight liquidity and also slowing CASA deposits. The intense competition for longer term deposits has led to deposit rates hitting all-time highs, with rates also being constantly revised upwards as banks competed amongst themselves.  This has already impacted net interest margins of banks, but depositors are enjoying the benefits of positive real rates after a long time. With gross financial savings of households having fallen steeply to 5.1 percent of GDP in fiscal 2023, from 7.2 percent previously, this is another perspective that the RBI may want to be watchful about. MPC Meet

SA Raghu is a columnist who writes on economics, banking and finance. Views are personal and do not represent the stand of this publication.MPC Meet

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