The Reserve Bank of India (RBI) is likely to start cutting the policy repo rate only from the first quarter of the next financial year, 70 per cent of participants said in a Business Standard poll conducted ahead of this week’s monetary policy review.
All the 10 respondents expect the six-member of the monetary policy committee (MPC) of RBI to maintain the status quo for the third consecutive policy review even if inflationary pressures resurface on the back of rising vegetable prices.
The RBI will announce the review of the policy on August 10.
After raising the repo rate by 250 basis points to 6.5 per cent between May 2022 and February 2023, the MPC decided to hit the pause button in the April review of the monetary policy. The pause was also maintained in the June policy review meeting. RBI Governor Shaktikanta Das emphasised that it was merely a pause and not a pivot, leaving the door open for possible future tightening measures.
“We expect the MPC to keep policy rates unchanged in its August meeting. We expect the MPC to flag resilient economic growth, and anchored underlying inflation as reasons to monitor incoming economic data while keeping policy settings on hold,” Rahul Bajoria, Managing Director & Head of EM Asia (ex-China) Economics at Barclays said. He expects a rate cut only in the first quarter of the next financial year.
All the 10 respondents also said the central bank is expected to keep the stance of the policy – withdrawal of accommodation – unchanged as liquidity continued to be in surplus mode in June and July.
8 out of the 10 participants said the central bank to revise the inflation projection for FY24 upward. In the June policy review, CPI inflation for FY24 was projected at 5.10 per cent.
CPI inflation – the main yardstick for RBI for policy making – stayed below the upper tolerance limit of 6% in April (4.7 per cent), May (4.31 per cent) and June 4.81 per cent).
“In July, however, headline CPI is expected to increase to 6.7 per cent yoy while core CPI is likely to fall to 5.0 per cent,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
“It is expected that the divergence between these two trends will increase up to 0.6 per cent and then headline CPI will start trailing towards core CPI in 6 months. We project Average CPI for FY24 now at 5.4 oer cent,” Ghosh said.
Core inflation, that is CPI excluding food and fuel, stayed stubborn around 5 per cent for some time.
“The surge in vegetable prices is likely to push the CPI inflation well above 6 per cent in July 2023. Moreover, the average for this quarter would exceed the latest estimate for Q2 that the MPC released in June 2023. As a result, we expect the MPC’s commentary to be fairly hawkish, amid a continued pause on the repo rate and stance in the upcoming policy review,” Aditi Nayar, chief economist at ICRA said.
RBI has projected average CPI inflation is Q1 at 4.6 per cent and 5.2 per cent for Q2.
“Given the transient nature of shocks in food items, particularly in some vegetables, our base case is a status quo on rates through FY2024, with the earliest rate cut foreseen only in the June 2024 policy review,” Nayar added.
None of the respondents expect the central bank to revise its growth forecasts for the current financial year.
BS Poll: RBI’s review of monetary policy scheduled 8-10 Aug
|
Respondent |
When do you expect the RBI to start cutting the repo rate? |
Do you expect the RBI to revise FY24 inflation forecast? If so, by how much? |
1 |
SBI |
Not yet firmed /Q1FY25 |
Yes |
2 |
Bank of Baroda |
Driven by data |
No |
3 |
DBS Bank |
Pause for FY24 |
Yes |
4 |
I Sec PD |
Not in Foreseeable future |
Yes |
5 |
Axis Capital |
Q1FY25 |
Yes |
6 |
STCI |
Q1FY25 |
Yes (30-40 bps higher) |
7 |
Yes Bank |
Maybe Q1FY25 |
Yes (20 bps higher) |
8 |
HDFC Bank |
Q1FY25 |
Yes |
9 |
Barclays |
Q1FY25 |
No |
10 |
ICRA |
June 2024 |
Yes, up by 20 bps to 5.3% |
All of the respondents expected the RBI to keep the policy repo rate unchanged in the August policy review.
None of the respondents expects the RBI to change the policy stance, and FY24 growth forecast.