By Abhishek Bisen, Head – Fixed Income at Kotak Mahindra AMC
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) will be announcing its decision on the repo rate on October 9, 2024. The upcoming meeting will be keenly watched as it is the central bank's first following the US Fed's 50-basis point rate cut. The MPC has kept the benchmark rate unchanged since April 2023, at 6.50 percent.
This MPC will see three new external members of varied academic backgrounds begin their four-year terms as part of the six-person rate-setting panel.
India’s headline consumer inflation grew 3.65 percent year-on-year (YoY) in August 2024 as against 3.54 percent in July 2024. Food inflation stood at 5.66 percent in August 2024. The headline inflation was below 4 percent for the last two months primarily due to a favourable base effect, but is expected to inch up again in September 2024 as the effect weakens.
However, the headline (CPI) inflation for Q2FY25 is expected to be lower than 4.4 percent, as forecast by the RBI. Further, various factors such as the above-normal monsoons (108 percent of the long-term average), refilled reservoirs, healthy sowing patterns, and lower global food prices support lower food prices in the medium-term.
On the liquidity management front, the RBI has been well balanced. India received large foreign inflows in the debt market after the inclusion of government bonds in global indices. The inflows amounted to $4.8 billion in July-August compared to $2.8 billion in May-June, which has led to an easing of the systematic liquidity. This was observed in the weighted average call money rate, which has eased by approximately 25-basis points (bps) in the last few months.
The real GDP growth rate moderated to 6.7 percent in Q1 of FY2024-25 compared to the 8.2 percent in Q1 FY2023-24, whereas the real GVA grew 6.8 percent in Q1 of FY2024-25, compared to 8.30 percent in the same quarter of the previous financial year. This moderation can be due to lower government spending in Q1 because of the general elections Moreover, the manufacturing Purchasing Managers’ Index (PMI) stood at 56.5 (an eight-month low) <which month> compared to 57.5 in August (2024?). Oil prices have also remained contained in the past month.
The rate cut cycle is underway in most of the major economies. The European Central Bank (ECB) cut its deposit rate for the second time since June 2024. The Bank of Canada (BoC) reduced its benchmark rate for the third time in September 2024. The most notable and anticipated rate cut was of the largest economy in the world, the United States — a 50 bps reduction in September 2024, and hints of further cuts in 2024 in its Summary of Economic Projections. Indonesia also saw a 25 bps rate cut in September 2024.
Overall, lower government capex, moderating growth rate, above-average rainfall, softening of global food inflation, etc., will be the key considerations in the upcoming meeting. Moreover, global uncertainty is growing as the war in the Middle East has been intensifying, which may impact the supply chain and trigger an escalation of the falling oil prices.
Given all this, we may expect the MPC to retain the repo rate in the upcoming meeting, but change its stance to “neutral” from “withdrawal of accommodation.” Indeed, the rate-cut cycle may start from December 2024 as by then the RBI will have a better picture of the harvesting season and the Q2 FY2024-25 GDP data.
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