Das Indicates Clear Sign Of Decoupling Of RBI From US Fed

We factor in the first rate cut in October 2024: Dr. Soumya Kanti Ghosh

Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India

FinTech BizNews Service 

Mumbai, June 8, 2024: Along predicted lines, RBI MPC kept the repo rate at 6.50% (eighth-time in a row), though the decision saw increased dissent. RBI also decided to remain focused on the withdrawal of accommodation Constructive dissent, as they say, is the bedrock of healthy deliberations amidst staying tuned to long-term objectives and hence one should not read between the lines much, says a research report from the State Bank of India’s Economic Research Department. The report has been authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

 Disagreement on 16 decisions

Interestingly, 32 of the 48 decisions of the MPC on the repo rate have been unanimous with respect to the direction of policy rate change while there was disagreement on 16 decisions. The disagreement with the ‘majority view’ was not limited to external MPC members; even internal members had differences on the size as well as direction of policy rate changes, negating views in literature that only external members help avoid “groupthink”.

Inflation projection

RBI retained its inflation projection for FY25 at 4.5% with Q1 at 4.9%, Q2 at 3.8%, Q3 at 4.6%, and Q4 at 4.5%. The outlook for inflation will largely be shaped by the food inflation trajectory. Further, volatility in crude oil prices and financial markets along with firming up of non-energy commodity prices may pose upside risks to inflation. RBI enhanced its Real GDP growth projection for FY25 by 20 bps to 7.2% (Q1: 7.3%, Q2: 7.2%, Q3: 7.3%, and Q4: 7.2%) with risks evenly balanced. The expectation of a normal monsoon augurs well for agriculture and rural demand while sustained momentum in manufacturing and services activity may enable a revival in private consumption. However, the bright outlook may be clouded by geopolitical tensions, volatility in international commodity prices, and geo-economic fragmentation.

Synchronized rate actions result in more volatility

In a clear sign of decoupling of RBI from the US Fed that was a given earlier, the RBI governor has clearly stated that though the RBI considers the impact of the US/ or other advanced countries’ policy change, the rate decision will be majorly influenced by domestic growth and inflation outlook. This sets the ball for a possible divergence between individual paths and timing of rate cuts even as ECB to Bank of Canada to Swiss SNB and Swedish Riksbank have already pivoted to rate cuts. In fact, past experience shows synchronized rate actions result in more volatility. The Governor has vociferously cautioned about the persisting gap between credit and deposit growth rates and suggested banks to re-strategise their business plans.

System liquidity in future may become agnostic to Government spending

Meanwhile, liquidity has turned into surplus in Jun’24 after remaining in deficit during 20 Apr-31 May’24. However, the Government is moving towards JIT mechanism of fund transfer whereby Government cash balances has moved to RBI E-Kuber and hence system liquidity in future may become agnostic to Government spending. Thus liquidity management  will continue to remain one of the most critical issues during this fiscal and RBI may have to innovate on liquidity  augmentation tools going forward.

Deposit centricity for banks from savers on substitution and competition

One of the most important announcements in today’s policy deliberations for banks concerns enhancing the Bulk Deposit limits to ₹3 crore and above from earlier ‘Single Rupee term deposits of ₹2 crore and above’ brought forth in 2019. This move reflects the changing landscape of liquidity, as also deposit centricity for banks from savers on two aspects; substitution and competition. The flexibility offered to major banks as also SFBs (already offered a glide path by the regulator to convert into Universal Banking avatars) to decide the optimal bounds of pricing will imbibe a better visibility on ALM front. Colloquially, this could also hint at either bank lending rates remaining higher for longer (than earlier anticipated) or the NIM of banks to retract once a benign rate cycle begins. Further, export and import regulations are proposed to be rationalized under FEMA to promote ease of doing business as cross border trade transactions are rapidly undergoing change.

Harnessing advanced technologies

Rising incidences of frauds has been a matter of concern. Accordingly, RBI decided to form a committee that will explore the possibility of creating Digital Payments Intelligence Platform which will harness advanced technologies to mitigate payment fraud risks. Furthermore, the third edition of our global hackathon, “Harbinger 2024 – Innovation for Transformation” will be launched with two overarching themes viz., ‘Zero Financial Frauds’ . On the payment side RBI has extended facility of standing instruction on per-paid instruments such as FASTag and UPI Lite. The idea is to provide an auto-replenishment facility to the customer and avoid repetitive transactions.

Expect first cut in October 2024

In all the June monetary policy was mixed bag as it happened in the midst of political transition. While the direction of policy is more or less decided, RBI has adopted more cautious stance to observe new government moves. Overall, RBI will continue the hold the rates in coming policy as well and will revisit the stance in H2 of FY25. We expect first cut in October 2024.

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