MPC: Cautiously optimistic

We continue to expect status quo on repo rate through H1 FY25

 Radhika Piplani

Chief Economist

DAM Capital Advisors

• The MPC members so far are optimistic on growth despite a few indicators suggesting mixed performance. However, an MPC member conceded that there is ‘growing evidence that inflation is undermining growth – people are not increasing discretionary spending in view of high inflation and this is slowing sales growth of corporations’.
• Further repo rate hikes are off the table with transmission of cumulative 250 bps repo rate hike still underway. But there remains readiness to act if the situation warrants to not just tame inflation but more importantly anchor inflation expectations.
• Despite which, we expect no change in repo rate through H1 FY25. Tight liquidity conditions through OMO sales would be the preferred tool with the RBI to curb inflationary impulse. As per Dr. Goyal prudential tightening, such as raising LTV ratios or risk weights, would be preferable to raising policy rates more, if the situation warrants. 

• Growth outlook comforting; inflation a mixed bag According to MPC minutes, domestic economy is holding well and is expected to be boosted by festive consumption demand, pick up in investment intentions and improving consumer and business outlook. On the inflation outlook however, Dr Shaktikanta Das clearly stated that it ‘continues to be beset with uncertainties, especially from adverse weather events, the playout of El Niño conditions, uncertainties in global food and energy prices and volatility in global financial markets. In this situation, monetary policy must remain actively disinflationary to ensure that ongoing disinflation process progresses smoothly’. Unfortunately, recent Enterprise surveys by the RBI point to continued input price pressures in Q3FY24 and Q4FY24 and expectations of higher selling prices, particularly in the manufacturing and infrastructure sectors as compared to the services sector.
•  Key Statements by MPC members 

Dr Ranjan: (i) At this juncture, three global trends, among many others, need to be closely watched – rising crude oil prices, rising US yields and rising US dollar. (ii) On domestic front, growth and inflation broadly moving in anticipated direction, monetary policy needs to hold on while earnestly persevering with disinflationary approach and remaining watchful with readiness to act if the situation demands. Dr Goyal: (i) Indian growth trends also continue to be mixed. (ii) Many indicators point towards a revival in private investment post recovery, but some surveys suggest election uncertainty may delay projects. This is unlikely, however, in sectors that are close to full capacity utilization with robust domestic demand. 

• MPC’s objective ‘to anchor inflation expectations, rather than inflation per se’ 

As per Dr. Patra, ‘anchoring of inflation expectations is incomplete and muddied by uncertainty, going by the increase in variability of median expectations of households and the underperformance of revenues of businesses relative to their profits’. Similar concern has been raised by Dr. Ranjan. According to him inflation expectations are backward looking and even though core inflation is seen moderating, the occurrence of multiple large adverse supply shocks could eventually stall the ongoing disinflation process. Dr. Goyal added that status quo on ‘withdrawal of accommodation’ stance signals MPC’s determination to reach its 4% inflation target. This stance rules out a rate cut. It allows a rise but that will not be required unless there are second round effects from the repeated supply shocks. Overall, these statements reflect MPC’s concern on inflation outlook given volatility in both global fuel and food prices. It reinforces the intent of the MPC members to ‘keep real interest rates high enough for as long as is necessary to drive projected inflation close to the 4% target on a sustainable basis.’ As such, we continue to expect status quo on repo rate through H1 FY25 with liquidity conditions remaining tight throughout.