MUMBAI: The Reserve Bank’s rate-setting panel MPC on Wednesday begun its three-day monetary policy review meeting — the first chaired by the new governor Sanjay Malhotra. Five of the six members of the panel are new.
The markets and Mint Road observers are expecting the first repo rate cut in nearly five years on Friday.
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 rate in the February 2023 review when it had increased the rate by 35 bps to 6.50%. The last time the RBI reduced the repo rate was in May 2020 by 50 bps t0 4%.
The MPC meeting comes amid falling rupee, which has lost over 3% since the December meeting, and tight liquidity conditions despite the central bank infusing close to `5 lakh crore since January via a slew of measures like VRR rupee-dollar swaps and OMOs. The central bank had cut the CRR by 50 bps in December. A global trade war is another area that the MPC will have to consider.
“The rate-cut cycle is likely to be shallow given global uncertainties, a neutral stance offers the MPC more flexibility,” said Aditi Nayar, chief economist at Icra Ratings, said, adding that 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 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.
Nathan Sribalasundaram, Sonal Varma and Aurodeep Nandi of Nomura in a note also said 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 Wednesday.