RBI may change policy stance, tweak growth forecast: Mint Poll

Mumbai: The rate-cutting season is upon us, well, almost. Nine out of 10 economists polled by Mint said the central bank’s rate-setting panel may introduce a 25bps (basis point) rate cut, but only in December.

For the meeting on 7-9 October, the consensus was that the panel is likely to keep the benchmark repo rate unchanged at 6.5% for the tenth successive time. This will be the first meeting of the six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) after half the members were changed last week.

In terms of policy stance, just half the economists polled by Mint expect the MPC to retain its stance of ‘withdrawal of accommodation’, while the other half expects an upgrade to ‘neutral’ for the first time in two years since the rate hike cycle started. Between May 2022 and February 2023, RBI hiked repo rate by 250 bps, in a bid to ease inflation. A basis point is one-hundredth of a percentage point.

Status quo votes

In the previous MPC meeting in August, four members had voted for a status quo, while Ashima Goyal and Jayanth R. Varma had voted to reduce the repo rate by 25bps and to change the stance from withdrawal of accommodation to neutral.

Meanwhile, economists from Nomura expect a 25bps repo rate cut in October itself, but others such as Icra and Bank of America’s expectations were in line with Mint’s poll, with Bank of America predicting 100bps rate cut by December 2025, starting with this December.

“We expect the CPI inflation to undershoot the MPC forecast of 4.4% for Q2 FY2025, which may support a change in stance, although we do not expect any rate action in the MPC’s October 2024 meeting,” said Aditi Nayar, chief economist of rating agency Icra.

Also read |  Will a surprise uptick in August inflation put RBI rate cut timeline in limbo?

Rahul Bajoria, India and ASEAN Economist at Bank Of America, said in a report on 4 October that the guidance from RBI for near-term growth and inflation dynamics remains upbeat, which rules out any material risk of a change in monetary policy guidance in the October meeting.

“Governor Shaktikanta Das in his recent speeches has been categorically pushing back on any near-term turn, disassociating RBI’s monetary policy from the US rate cuts, and talking up future growth prospects,” the report stated. To be sure, on 18 September, the US Federal Reserve Bank delivered an outsized 50 bps cut for the first time in four years, and indicated more cuts adding up to 150bps by end-2025.

According to Nomura, a change in stance in the policy this week will give a signal to the market that a rate cut is due in December, while no change in stance is unlikely to change market expectations for the December policy meeting.

The inflation, GDP growth angle

Majority of economists polled by Mint expect 10-20bps correction in RBI’s FY25 GDP growth estimate of 7.2%, and inflation estimate of 4.5% for the year is expected to remain unchanged.

“We do not project any material forecast change, but the risk to RBI’s headline GDP growth and CPI inflation forecasts for FY25 are biased to the downside,” added Bajoria of Bank of America in his report. “Slowing growth and falling inflation offer room for the RBI to cut rates in coming months. We expect repo rate cuts of 100bps by December 2025, beginning December 2024.”

Also read |  Govt reconstitutes RBI’s monetary policy committee

Domestically, inflation has surprised with consumer price inflation (CPI) coming in at 3.65% year-on-year (y-o-y) in August compared to 3.6% y-o-y in the previous month. Although inflation is expected to rise further in September due to base effect and higher vegetable prices, favourable progress on monsoons is expected to keep the outlook on food prices sanguine.

The ‘new’ committee

Meanwhile, the upcoming meeting will see the three newly appointed external members join in—Saugata Bhattacharya, former chief economist of Axis Bank; Ram Singh, director of Delhi School of Economics; and Nagesh Kumar, director and chief executive of the Institute for Studies in Industrial Development (ISID).

Bhattacharya was in favour of rate cuts back in mid-August, but the other two members do not have much experience in monetary economics. The street, therefore, expects the new MPC members to go with the internal members of the RBI.

Also read |  RBI likely to maintain status quo on interest rates in Oct 9 MPC meeting: Report

“We think it is too early to take a view on the policy tilt of the new external committee. As of now, we see limited merit in changing our view that the first cut may come by December. But a stance change in October is not fully ruled out,” said Madhavi Arora, chief economist, Emkay Global Financial Services.

The liquidity angle

That said, the market will watch for any changes related to RBI's liquidity stance. Liquidity tightened in the second half of September on GST outflows and advance tax flows, though the pressure has eased over the past few days, on account of month-end spending.

The market will also keep a close watch on any decision regarding the new liquidity coverage ratio (LCR) framework guidelines, which are expected to come into place by 1 April 2025.

Also read |  Mint Quick Edit | Which way will RBI’s half-new MPC panel lean?

“The outlook for liquidity into December looks more challenging, given the expected rise in CIC on account of the festive season and uncertainty around FX, given upcoming US elections. Therefore, while we see the need for the RBI to turn more favourable in offering liquidity, a cut in the CRR would be a very dovish signal this early in the cycle,” added Nomura in its report. CIC refers to currency in circulation and CRR, cash reserve ratio.