From the repo rate to the MPC stance, here is what D-Street anticipates for today's RBI monetary policy despite global headwinds

 From the repo rate to the MPC stance, here is what D-Street anticipates for today's RBI monetary policy despite global headwinds

Following a two-day review that started earlier this week, Reserve Bank of India (RBI) Governor Shaktikanta Das will present the bank's fourth monetary policy decision for the fiscal 2023–24 period. Market experts and economists on D-Street generally anticipate that the central bank will maintain its hawkish policy stance and leave interest rates steady in light of India's lowering inflation data.

Most economists predict that the RBI would maintain its benchmark repo rate at 6.50 percent following the MPC meeting, with only a small number anticipating a 25 basis point increase. Analysts do not anticipate that the central bank will depart from its current policy of "withdrawal of accommodation." The recent increase in global crude oil prices, however, is probably going to keep the MPC's attention on India's inflation estimates in the next quarters.

RBI Monetary Policy: MPC to concentrate on managing inflation and liquidity

Inflation and liquidity management would remain the key themes of the rate-setting panel of the central bank. According to Emkay Global Financial Services, the near-term inflation trend is one of abrupt correction and structural stickiness in non-perishable food, and worries about growing input costs because of crude and a potential INR depreciation might eventually put core inflation at danger.

Due to a spike in food costs, India's consumer price index (CPI)-based inflation increased to 7.8% in July before dropping to 6.8% in August. The RBI then increased its forecast for retail inflation in the nation for 2023–2024 from 5.1–5.4%, up from 5.1–6% in its previous monetary policy meeting in June.

Regarding liquidity, in order to tighten monetary conditions and raise overnight rates above the repo rate, the RBI has been draining liquidity in recent weeks through short-term forex swaps and secondary market OMO (open market operations) sales. In its research note, the brokerage stated, "We expect this to continue, but it remains to be seen whether RBI will continue with ad hoc measures or announce a more permanent liquidity draining policy."

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Brokerages report that India's economic outlook is still mixed, with high-end consumer and government capital spending both solid, but lower-end domestic demand and exports remaining weak. Importantly, according to Institutional Equities in its analysis, "statistically buoyancy in real gross domestic product (GDP) could decline in Q2FY24 due to fading wholesale price index (WPI) deflation and headwinds from worsening terms of trade during the quarter." 

"As the lagging effects of prior tightening start to emerge and the global economy weakens further, in our view, India's economic growth shall likely slow down further," the brokerage continued. This prediction follows the economy's 7.8% growth in the April–June quarter, which was the fastest rate in a year due to a strong services sector and solid demand. 

Before the MPC decision, here are the analysts' predictions for RBI's monetary policy.

SBI Research predicts that the RBI would keep the key repo rate at its present level of 6.50 percent. According to the research written by Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI Research, a slowing seasonality in inflation will cause an extended halt in interest rates. The interest rate at which the RBI loans money to other banks is known as the repo rate.

The paper also states that as it is unlikely that inflation will fall below 5% for the balance of the 2023–24 fiscal year, the RBI should concentrate on removing accommodations.

The rating company Crisil also believes that the MPC will keep the policy rate in place at the meeting in October. A 25 basis point rate drop in the first quarter of 2024 is suggested by Crisil's August report, "RateView - CRISIL's outlook on near-term rates," as a conditional possibility.

Brokerages claim that the MPC wants to determine the magnitude of the current increase in international commodity prices as well as the overall effect of previous demand tightening. Given the near-term upside risks to inflation and the hawkish stance of the Fed and ECB, it may continue to refer to the "withdrawal of accommodation" for the time being.

The recent increase in commodity prices may influence the RBI's choice, but our argument is that it would prefer to wait. The Fed's decision in November and the length of the price increase would affect the MPC's decision in December. In its analysis, Nuvama Institutional Equities stated that domestic demand would continue to be impacted by historical tightening, rising real rates, and growth.

The RBI agreed to halt rate hikes at the most recent MPC meeting in August and to maintain the 6.5 percent repo rate, as it has done since February. Prior to that, the central bank increased the repo rate by a total of 250 basis points (bps) over the course of five meetings, beginning with an off-policy meeting in May 2022 and lasting until February 2023, in response to inflationary pressures brought on by the Russia-Ukraine war and pandemic's lingering effects.