RBI MPC Likely To Maintain Status Quo Till Jun 2024

Growth may not be a worry for the central bank for the next 2-3 quarters given the resilience in the Indian economy

Suman Chowdhury

FinTech BizNews Service

Mumbai, February 7, 2024: Suman Chowdhury, Chief Economist and Head, Research, Acuité Ratings & Research; shares his views on the eve of the RBI MPC policy  review meet: 

RBI MPC is likely to maintain the status quo on rates at least till Jun 2024. We anticipate a rate cut thereafter aggregating to 50-75 bps in the next six months. The policy stance may, however, be changed to neutral by Apr-24, given the low likelihood of a further rise in interest rates.

RBI MPC’s primary focus is to bring down CPI inflation sustainably to around 4% and this is unlikely to change. Growth may not be a worry for the central bank for the next 2-3 quarters given the resilience in the Indian economy. However, RBI will also keep an eye on rate differentials as it has an impact on the capital flows to India and the currency movements; therefore, the timing and extent of Fed rate cuts in the current calendar is also a key variable in the MPC decision.

Food inflation will remain a key risk factor for headline inflation in India. With the continuing impact of El Nino on agricultural impact, there is an upside risk to food inflation which can keep the overall CPI inflation near to 6% over the next six months. However, we expect the government to take timely and proactive steps to prevent any further and sharp rise in food prices particularly before the elections. Therefore, we don’t expect the headline inflation to go beyond 6.0% in the next 2 quarters. Any higher than expected pressure on food prices or on oil prices from any further flare up in West/Central Asia, may however, lead to a delay in the anticipated rate cuts in the next fiscal.

Core inflation has come down to a comfort zone below 4% and we believe that it is likely to be stable in the near term despite some pressures on food inflation. The overall private consumption demand remains relatively weak at 4.4% estimated for FY24.

While system liquidity remains in deficit, it has been supported through VRR auctions and this had led to some moderation in short term rates. Further, core liquidity is in a far better position given the low government expenditure so far in the fourth quarter. We don’t expect any material change in the current liquidity policy of RBI.

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