As the Indian stock market absorbs the results of the 2024 Lok Sabha Elections, attention will gradually turn to the upcoming monetary policy decision by the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC). RBI MPC begins its three-day meeting on Wednesday, June 5, and the decision is due on Friday, June 7.
Repo rates have been at the current level for over a year now. RBI last hiked the repo rate to 6.5 per cent in February 2023.
Even though most experts expect India’s central bank to maintain its repo rate and policy stance, the June MPC meeting is important as market participants will look for cues on inflation and growth dynamics in RBI Governor Shaktikanta Das’ statement.
India’s Consumer Price Index (CPI)-based inflation, also known as retail inflation, eased to an 11-month low level of 4.83 per cent in April from 4.85 per cent in March, aided by falling crude oil prices.
Indian economy recorded solid growth last year and its outlook for the current financial year remains strong. Beating D-Street estimates, India’s gross domestic product (GDP) for FY24 came in at 8.2 per cent.
Experts say as India’s macroeconomic outlook remains solid, RBI can confidently keep rates at elevated levels for longer, as long as inflation remains above its 4 per cent target.
We gathered experts’ views on their expectations for the RBI MPC’s June meeting. Here’s what they said
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SBI Research
SBI Research believes the first RBI cut may happen in Q3FY25, and rate cuts may be shallow. It points out that there is strong evidence that the actions of advanced-economy central banks predict the actions of emerging-economy central banks.
SBI Research believes the stance should continue as the ‘withdrawal of accommodation’.
“The CPI inflation is expected to approach the RBI tolerance band in the financial year’s first half (H1FY25). CPI inflation is expected to remain close to 5 per cent till May and decline thereafter to 3 per cent in July. Inflation is expected to stay
below 5 per cent beginning October till the end of FY25. For FY25, CPI inflation is likely to average 4.5 per cent versus 5.4 per cent in FY24,” said SBI Research.
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Nuvama Wealth Management
Nuvama believes the MPC may maintain the status quo on policy rates, but soften the policy stance from “withdrawal of accommodation” to “neutral” in the policy review on June 7.
Strong GDP numbers, headline CPI above target and seeming delay in the Fed’s rate cuts shall keep the RBI in hold mode. However, weak domestic consumption, consistently softening core inflation and faster-than-expected fiscal consolidation could move the MPC to soften its monetary stance to neutral.
The rate-hiking cycle has ended, although the RBI is tweaking regulatory norms to pre-empt any build-up of excesses. However, the rate easing cycle might have to wait until Q4FY25.
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Mahendra Kumar Jajoo, CIO- Fixed Income, Mirae Asset Investment Managers
“RBI is expected to keep key policy rates unchanged at the forthcoming MPC meeting announcement on June 7. However, the guidance is expected to turn slightly dovish compared to the previous meeting,” said Jajoo.
The market will watch keenly if there is any fresh measure to address the current squeeze on liquidity.
RBI has declared a record dividend this year, more than double that projected in the Budget. Oil prices have remained range-bound, notwithstanding the recent escalation in geopolitical tensions in the Middle East. Tax collections remained robust, with GST exceeding the ₹2 lakh crore mark for the first time in April 2024. Further, there has been a slight easing in financial conditions on the global stage after the Fed literally ruled out any further hikes but guided for more patience with rate cuts.
Bond yields have eased in recent weeks due to the factors mentioned above. The benchmark 10-year yield has traded below 7 per cent after a gap of nearly one year, reflecting the optimistic disposition of market participants.
“Post-policy, market yields are expected to soften further if the guidance becomes more supportive,” said Jajoo.
Vikrant Mehta, Head – Fixed Income, ITI Mutual Fund
Since the MPC’s last meeting, geopolitical volatility rose in the first half of April, and though it appears to have subsided post that, underlying tensions continue to simmer. Furthermore, global markets now anticipate the Fed to be on a “longer than anticipated hold” compared to March.
“In the current environment, though India’s headline inflation is expected to moderate further, we feel that the RBI is unlikely to make changes to both – policy rate as well as the stance of the policy,” said Mehta.
Parijat Agrawal, Head – Fixed Income at Union Mutual Fund
Agrawal expects the MPC to keep the policy rate unchanged at 6.5 per cent, and maintain its ‘withdrawal of accommodation’ stance.
“The system liquidity is expected to ease after the formation of the new government as the new government will resume spending. The headline CPI may remain sticky due to volatile food inflation. Any rate cut depends upon CPI moving towards 4 per cent on a durable basis and is also contingent on the US FOMC decision,” Agrawal said.
“Fiscal consolidation, upgrade of S&P’s Indian sovereign rating outlook to positive, inclusion of India in JPM bond index from this June, is positive for the bond markets,” said Agrawal.
Aditi Nayar, Chief Economist, Head of Research and Outreach at ICRA
“The recent inflation data and the outlook for prices of food and commodities had suggested a status quo on the rates and stance in the upcoming June 2024 monetary policy review,” said Nayar.
“This has been further cemented by the higher-than-forecast expansion in the Indian economy in Q4FY24, which led to the full-year GDP growth printing above 8 per cent. As a result, the likelihood of a stance change in August 2024 followed by a rate cut in October 2024 has eased unless an abundantly well-distributed monsoon quells food prices in a sustainable fashion,” said Nayar.
Mandar Pitale, Head- Treasury, SBM Bank India
“MPC is expected to continue with its firm commitment to focus on a 4 per cent goal post for CPI securing using appropriate monetary policy tools,” said Pitale.
During the last few months, RBI has actively managed banking system liquidity to calibrate monetary conditions despite stable policy rates. The resilience of GDP growth, backed by sustained momentum in domestic demand conditions, provides the space to defer the start of the easing cycle while staying focused on inflation.
“At the backdrop of the fragile outlook for the global economy amidst stalling in the descent of inflation and thus reigniting risks to global financial stability, MPC is expected to hold policy rates for a foreseeable future going ahead with a likelihood of starting rate easing cycle in last quarter of current calendar year. Favourable monsoon impact on the food inflation trajectory will have a major influence on the commencement of the easing cycle,” said Pitale.
Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
