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RBI has kept the repo rate unchanged at 6.5% since February 2023 and experts think some easing could only be possible in 2024.
The RBI kept the repo rate unchanged at 6.5 % in its last bi-monthly review (October) also amid risks from higher food inflation. (File photo of RBI Governor Shaktikanta Das)
The Reserve Bank of India is likely to keep the benchmark interest rate unchanged for one more time in its bilateral monetary policy review later in the week as inflation has breached its upper tolerance limit and may also moderate the growth forecast given the disappointing second quarter GDP numbers, experts say.
RBI’s Inflation Projections for 2024-2025
In its October Monetary Policy Committee (MPC) meeting, the RBI retained its inflation projection of 4.5% for 2024–2025. The quarterly estimates stand at 4.1% for Q2, 4.8% for Q3, and 4.2% for Q4. Additionally, the RBI projects consumer price index (CPI) inflation for Q1 of FY 2025–26 at 4.3%, with risks assessed as evenly balanced.
Declining Inflation and Base Effect
RBI Governor Shaktikanta Das highlighted a notable decline in headline inflation, dropping to 3.6% in July and 3.7% in August from 5.1% in June. This reduction was largely attributed to a base effect observed in July.
Challenges in Reducing Interest Rates
It was widely anticipated that the RBI would start reducing the benchmark interest rates soon but the central bank will have little option this time around as the latest print of retail inflation is above 6 %.
Inflation Trends Over the Past Six Months
Over the past six months of 2024, India’s retail inflation, measured by the CPI, has experienced notable fluctuations, primarily driven by changes in food prices. The government has tasked the RBI to ensure that CPI-based retail inflation stays at 4 % with a margin of 2 % on either side.
Month-by-Month Breakdown of Inflation
Here’s a detailed overview of the last 5 months:
June 2024:
Retail Inflation: Around 5.1%
Food Inflation: 9.55%. It was elevated due to higher costs of vegetables and pulses.
July 2024:
Retail Inflation: 3.54%
Food Inflation: Declined to 5.42%, influenced by a favourable base effect.
August 2024:
Retail Inflation: 3.65%
Food Inflation: Slight increase to 5.66%, with vegetables and pulses contributing to the rise.
September 2024:
Retail Inflation: 5.49%
Food Inflation: Rose to 9.24%, driven by significant increases in vegetable prices.
October 2024:
Retail Inflation: 6.21%
Food Inflation: Surged to 10.87%, marking the highest rate since July 2023, with vegetables experiencing a 42.18% price increase.
The data for November is expected to come by December 12.
Key Drivers Across the Period:
-Food Inflation: A major contributor, especially due to high vegetable, pulses, and edible oil prices.
-Base Effect: Helped reduce inflation during July-August but had limited impact in later months.
-External Factors: Weather disruptions and supply chain issues significantly influenced food prices.
RBI’s Stance on Interest Rates
RBI has kept the repo or short-term lending rate unchanged at 6.5 % since February 2023 and experts think some easing could only be possible in February.
RBI should avoid a “knee-jerk” response to the tepid Q2FY25 GDP growth data, and is most likely to cut rates only in February, analysts said on Monday.
While the central bank is likely to opt for a status quo in the repo rate for the 11th consecutive time on Friday, at least two watchers said it may cut the cash reserve ratio (CRR) or tweak the proportion of deposits parked with the central bank for helping with the liquidity situation.
Expectations for the December MPC Meeting
The Reserve Bank governor-headed six-member MPC is scheduled to meet from December 4 to 6, 2024. The decision of the rate-setting panel will be announced on December 6 by Governor Shaktikanta Das.
Revised GDP Growth Estimates for FY25
Almost all of the analysts have revised down their FY25 GDP growth estimates, with some expecting it to touch as low as 6.3 %, as against the central bank’s forecast of 7.2 %.
Analysts Opinions on Monetary Policy Actions
- SBI: Analysts suggest that the RBI should avoid a “knee jerk” response to the tepid Q2FY25 GDP growth data and is most likely to cut rates only in February.
- Deutsche Bank: Expects a rate cut in February but suggests it “makes sense” to cut the CRR in the upcoming policy review.
- HSBC: Predicts rate cuts of 0.25% each in the February and April meetings.
- Bofa Global Research: Also expects the RBI to stay on hold due to the headline inflation being over the 6% target.
“It is better that the Q2 growth numbers do not prompt a knee jerk reaction in terms of monetary impulse like rate cut as headline inflation continues to trade at uncomfortable levels, though it is supposed to moderate from November,” economists at the country’s largest lender SBI said.
They, however, said that the RBI needs to recalibrate its liquidity strategy, but added that it will resist the CRR option. Instead, it may look at tweaking CRR at a micro basis on specific liabilities, and make the tool counter cyclical for future.
Economists at German brokerage Deutsche Bank joined peers in expecting a rate cut in February, but added that it “makes sense” to cut the CRR at the upcoming bi-monthly policy review on Friday.
They expect the FY25 to be at 6.5 % as against the earlier expectation of 6.9 %, and added that the FY25 number will likely be maintained in FY26. However, they made it clear that a 6.5 % growth number is far below the potential growth rate of India.
HSBC’s economists, however, said that its estimate of the country’s growth rate potential is at 6.5 % and added that the heady 7 % plus clips observed in the recent past was never sustainable as it was led by a weak base of the Covid period.
The HSBC economists said there will be rate cuts of 0.25 % each in the February and April meetings of the monetary policy committee, and the rate setting panel is likely to opt for a status quo in rates on Friday.
American brokerage Bofa Global Research also said that RBI will stay on hold on Friday citing the headline inflation being over the 6 % target.
“The guidance will be more balanced, and more votes for rate cuts cannot be ruled out, along with steps to augment liquidity,” it added.
Outlook on Repo Rate and Economic Growth
Madan Sabnavis, Chief Economist, Bank of Baroda said given the rather uncertain global environment and the possible impact on inflation and the fact that currently inflation has been averaging close to 5.9 % in the last two months, a status quo on the repo rate will be the logical outcome from the policy.
“There would be a change in RBI projections for both inflation and GDP as inflation has been higher so far than the RBI forecast for Q3 and GDP growth has come much below expectations in Q2. It would hence be of interest to see what the projections this time are,” Sabnavis said.
Aditi Nayar, Chief Economist and Head – Research & Outreach, ICRA, said that with the CPI inflation having breached the 6 % upper limit of the medium-term range of 2-6 % in October 2024, ICRA anticipate a status quo from the MPC in its December 2024 meeting, in spite of the GDP growth print for Q2 FY2025 sharply undershooting the committee’s expectations.
“At the same time, we anticipate that the MPC will moderate its growth forecast for FY2025 next week. A February 2025 rate cut may be forthcoming if the next two inflation prints recede,” Nayar added.
The central bank last hiked the repo rate to 6.5 % in February 2023 and since then it has held the rate at the same level.
The RBI kept the repo rate unchanged at 6.5 % in its last bi-monthly review (October) also amid risks from higher food inflation.
In its October policy, the RBI had projected real GDP growth for 2024-25 at 7.2 % with Q2 at 7 %; Q3 at 7.4 %; and Q4 at 7.4 %.
