
MUMBAI: The Monetary Policy committee (MPC), the lending rate setting panel of the Reserve Bank of India (RBI) has begun its three-day monetary policy review meeting. The panel, chaired by the new governor Sanjay Malhotra for the first time, has five of its total six members new to the Committee.
The markets and banking sector analysts are expecting the first repo rate cut in almost five years coming in on Friday, even though the hands of the central bank is nearly tied, barring the budget that did not make any proposals that are expansionary or inflation-inducing or fiscally loose, except the big tax giveaways that can spawn inflation if the beneficiaries get onto a spending/consumption-spree.
The monetary policy committee has kept the rate high at 6.5% for the past 11 review meetings raising it cumulatively 250 bps and stopped raising the repo rate in the February 2023 review when it had increased the rate by 35 bps to 6.50%. The last time RBI reduced the repo rate was in May 2020 in the middle of the pandemic when it had slashed it an unconventional 50 bps to 4%.
The MPC meeting comes amidst a torrent of bad news—with the rupee falling like nine pins—having lost more than 3% since the December meeting when it had cut the CRR by 50 bps, tight liquidity conditions despite the central bank infusing close to 5 trillion since January through a slew of measures like VRR rupee-dollar swaps and OMOs, and a global trade war the repercussions of which are still unfolding and an economy that has lost its mooring and seeking a stronger keel to anchor.
“The rate-cut cycle is likely to be shallow, and given global uncertainties, a neutral stance offers the MPC more flexibility,” said Aditi Nayar, the chief economist at Icra Ratings said, adding to begin with, there will be a 25 bps reduction likely on Friday.
Pencilling in a 25 bps repo cut, Dipti Deshpande, the principal economist at Crisil Ratings said the budget has pursued the path of fiscal tightening but has also ensured it remains growth supportive for one and for another led by softer food prices, retail inflation is expected to decline in January inching closer to the 4% target. The tighter fiscal stance and expectations of lower inflation should open the path for rate cuts.
Nomura's analysts -- Nathan Sribalasundaram, Sonal Varma, Aurodeep Nandi, also said in a note that, in their base case scenario, the RBI does not over-deliver but in the medium term, still expect a deeper cutting cycle basing their pessimism to the bleeding rupee and the still unfolding trade wars.
“Historically, the longest the RBI has waited between the end of a rate hike cycle and start of a rate cut cycle is 11 months. This time it has been almost a two-year gap. Therefore, rate cuts should start as soon as possible, in our view. Otherwise, there is a non-trivial risk of falling behind the curve,” they said in a note on Wednesday.
Kaushik Das, the chief economist at Deutsche Bank India also expects a quarter percentage point reduction, saying the baton now passes from the fiscal authorities to the RBI to support growth.
The Budget boost alone will not revive growth, in our view, as only a small fraction of the households pay taxes. Ultimately, the monetary policy will have to do the heavy lifting to support growth in 2025 and beyond, he said.
“The 100 bps rate by the Fed opens up room for 50 bps easing by the RBI and so we expect the RBI to cut policy rate by 25 bps each in February and April. The sooner the rate cuts are delivered, the lesser will be the growth sacrifice,” he added.
Careedge Ratings said the MPC meeting comes amid slowing growth, moderating food inflation, tighter liquidity, and financial market volatility. So the MPC is expected to shift from concerns over high inflation to supporting economic growth and so we expect a 25 bps repo cut on Friday while retaining a neutral stance and one more 25 bps reduction through the course of the next fiscal.
Analysts base their rate cut optimism to the weak growth rate—Q2 GDP slumped to seven quarter low of 5.4% leading the RBI to lower its forecast by 60 bps to 6.6% for this fiscal. Another positive is the falling retail inflation which declined in the past two months to 5.22 percent in December, 5.48% in the previous month and the fiscal prudence in the budget. Additionally, recent liquidity measures have further increased this possibility.
“I expect a 25 bps reduction on Friday and don't think another CRR cut,” said Madan Sabnavis, the chief economist at Bank of Baroda.