RBI to remain divergent among central banks, maintain status quo on policy rates till late FY25: SBI Caps

The Reserve Bank of India (RBI) is expected to remain divergent among global central banks and will likely maintain the status quo on policy well into late FY25. According to SBI Capital Market's recent report on domestic drivers titled ‘EcoCapsule’, India's real growth outlook for FY25 remains fair at seven per cent year-on-year (YoY) even as global growth momentum began to falter in August 2024 as most central banks are sliding into rate cut mode.

The RBI at its last bi-monthly monetary policy committee (MPC) meeting on August 8 decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns. However, MPC members Dr. Ashima Goyal and Prof. Jayanth R. Varma voted to reduce the repo rate by 25 basis points, and change the stance to neutral. The remaining four members voted to maintain the status quo on the policy rate for the ninth consecutive time.

Also Read: RBI MPC Minutes: Growth impulses allow policy to focus on disinflation, food inflation sticky to core; 5 key highlights

How is RBI divergent from central banks?

In its report, SBI Caps said external MPC members have suggested that the high real rates could unnecessarily slow down the economy. They have also highlighted the need for supply-side measures to rein in food inflation and stimulate growth further. SBI Caps expects India's nominal GDP growth at ~10.5 per cent YoY in FY25.

Due to increased government spending, India's banking liquidity hit a record surplus in over a year. RBI has managed this surplus with open market operations (OMO) sales and variable rate reverse repo (VRRR) auctions that have received improved responses. A higher rate of increase in the money stock, over and above that in currency with the public, indicates sustained deposit growth, especially after a tumultuous June 24.

Also Read: US Fed set to announce first rate cut in four years next month: How will it impact India’s RBI policy? Experts weigh in

Globally, early US indicators hinted at a downturn, such as rising jobless claims and slowing housing sales. China also faces challenges, with industrial sectors under pressure and housing stimulus measures proving ineffective. Meanwhile, inflation has notably eased, exemplified by crude oil prices falling on demand fears.

The global environment has thus markedly shifted towards policy easing. US Fed Chair Powell has all but confirmed a rate cut in September 2024, and the market is now factoring in ~100 bps of cuts in CY24. European Central Bank (ECB) and Bank of England (BoE) will likely follow suit to revive Europe from economic despair.

Also Read: RBI vs US Fed: Which central bank will cut interest rates first? Here’s a 5-point analysis

RBI's current stance on monetary policy

The central bank's rate-setting panel said in its minutes-of-the-meeting that the policy must continue to be disinflationary until a durable alignment of headline inflation with the target is achieved. The RBI's rate-setting panel believes that food prices remain elevated, which may adversely result in spillovers to core inflation.

The MPC expects domestic growth to hold up on the strength of investment demand, steady urban consumption, and rising rural consumption. The MPC also noted there were indications of core inflation bottoming out. It added that adverse climate events remain an upside risk to food inflation, and crude oil prices are volatile due to demand concerns and geopolitical tensions.

According to the central bank, the real gross domestic product (GDP) growth for 2024-25 is projected at 7.2 per cent, with Q2 at 7.2 per cent, Q3 at 7.3 per cent, and Q4 at 7.2 per cent. Retail inflation for 2024-25 is projected at 4.5 per cent, with Q2 at 4.4 per cent, Q3 at 4.7 per cent, and Q4 at 4.3 per cent.

Also Read: RBI members in rate-setting panel reject excluding food from inflation target

D-Street forecasts on RBI policy rates

Domestic brokerage Elara Securities said, "Considering risks to headline inflation owing to volatile and high food prices amid healthy growth backdrop, we continue to expect the MPC to hold through CY24.''

The brokerage expects the first rate cut in Q1CY25 or Q4FY25. We price in the first 25bps rate cut from the US Fed in September 2024 and another in December. 

‘’This can come as a welcome development for the RBI holding on to rates, as the INR can see more carry-related positive sentiments at a time when robust growth and inflation dynamics provide the necessary policy space,'' it added.

SBI Caps expects India's headline inflation (CPI) to average ~4.7 per cent in FY25 with evenly balanced risks. It also expects the government's (Union + State) fiscal deficit ~eight per cent of GDP in FY25. The 10Y G-Sec yields is expected to remain below ~seven per cent in the coming months.
 

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