RBI Likely To Revise GDP Forecast By 25-30 Bps

The shortfall in agricultural output and uncertain weather conditions can also lead to potential upside risks to the headline inflation

FinTech BizNews Service

Mumbai, December 6, 2023: Acuité Research has revised its growth forecast from 6.0% to 6.5% after the GDP data of the second quarter. Nonetheless, Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research, states: “We expect a moderation in growth in the second half of the year given the impact of El Nino on rainfall in the current year and its consequent effect on agricultural output and rural demand. Some of the high frequency indicators such as two wheeler and FMCG sales as well as higher demand for MGNREGS reflect a weakness in rural incomes.”

There is a strong likelihood that RBI-MPC will keep the benchmark repo rate unaltered at 6.50% in the upcoming meeting and thereby continue with the “pause” mode for the fifth consecutive policy review. Suman adds: “It’s also unlikely that there will be any revision in the monetary policy stance of “Withdrawal of accommodation. We will look forward to RBI’s assessment of growth and inflation in its statement. GDP growth in the second quarter of the year has been significantly higher than market and RBI’s forecasts at 7.6% YoY, translating to a robust growth of 7.7% YoY in H1FY24. Given the stronger growth momentum, there is a possibility that RBI revises it GDP forecast for the current year by 25-30 bps from the existing figure of 6.50%.”

The shortfall in agricultural output and uncertain weather conditions can also lead to potential upside risks to the headline inflation which had moderated to 4.9% in Oct-23. With continuing firmness in prices of rice and pulses, food inflation can face upside pressures in a season which is typically conducive for food prices. Suman Chowdhury, further says: “However, we don’t expect any major uptick in inflation in the next few months due to the pro-active steps expected from the Government in a pre-election period to cool down food prices. Accordingly, we have retained our CPI inflation forecast at 5.6% for the whole year. It will be interesting to see if RBI makes any significant alterations to its existing forecast of 5.4%. We expect RBI to be cautious on the inflation front till the concerns on El Nino and agricultural output subsides. Also, the growth momentum in the economy remains strong and the transmission of increased interest rates is still a work in progress. Therefore, there is a strong rationale on the part of RBI to continue with the pause mode for the next six months.”

However, RBI is expected to maintain the system liquidity at a slightly deficit level to ensure better transmission of interest rates and this has been in evidence in the month of November.
With higher govt. bond redemptions scheduled in the current month and also the likelihood of higher FPI flows, RBI may consider the deployment of tools like OMO to suck up additional liquidity from the market.
It will be important to understand RBI’s stance on liquidity at this stage as that will also have a bearing on short-term rates and bond yields.”

MPC is also likely to maintain the status quo on rates

Mandar Pitale, Head- Treasury, SBM Bank India, believes: “Overall data prints released after October MPC are supportive for MPC to continue with its current “withdrawal of accommodation” stance. MPC is also likely to maintain the status quo on rates in the forthcoming policy announcement.

The present liquidity dynamic prevailing in the market is governed by shallowness in the systemic liquidity with the overnight rates hovering near the upper band of the policy rate corridor (MSF) supporting effective transmission of the past rate actions. The average monthly liquidity absorption for the last 2 months is well below INR 1 Lac crore. Since the present liquidity equation is expected to continue for the foreseeable future, RBI may not be required to resort to structural liquidity suction tools such as OMO sale in coming months.

Forward guidance on inflation, comments on behaviour of systemic liquidity going ahead as well as any explanation on not using the structural liquidity tools such as OMO Sales as touched upon in the previous MPC will be keenly watched by the market participants”.

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