Informist, Friday, Jun 2, 2023

By Team Informist

NEW DELHI – India's macroeconomic situation has changed for the better since the last time the Reserve Bank of India's Monetary Policy Committee met in April--inflation has fallen to below 5% in April from over 6%, and GDP growth has improved to above 6% from below 5%.

With this macroeconomic setting, the committee is widely expected to keep policy repo rate unchanged not just at the meeting from Tue-Thu, but also for the majority of this financial year. 

According to an Informist poll, an overwhelming majority of 29 out of 30 respondents expect the Monetary Policy Committee to keep the repo rate unchanged at 6.50% at the end of its three-day meeting on Thursday. Following the April CPI print, some analysts now expect the central bank to lower its inflation forecast for 2023-24 (Apr-Mar).

Equirus Securities was the sole poll participant which expects the rate setting panel to raise the repo rate by 25 basis points.

Apart from lower domestic inflation, poll participants expect an extended pause because of expectation that the US Federal Reserve may soon put an end to its aggressive rate hike cycle at its policy meeting on Jun 13-14.

"With the Fed widely expected to pause at the next meeting and India's inflation reading showing a significant drop, the RBI can breathe easily after a long time. A pause appears to be a no-brainer now," said Kunal Kundu, India Economist, Societe Generale.

According to CME FedWatch tool, about 73.8% Fed futures traders expect a pause by US Fed in June, while the rest expect a rate hike of 25 basis points.

While there is near unanimity on domestic rate decision front, the views on the policy stance are more diverse.

Six poll participants expect the rate setting panel to finally change its policy stance to "neutral" after keeping it at "withdrawal of accommodation" since June 2022. The majority still expects that catch-all stance to stay, despite no further rate hikes.

"Changing the stance to neutral at this stage will give the maximum optionality to RBI in manoeuvring the highly uncertain and volatile global macro backdrop, without committing to a pre-defined path one way or the other," said Kaushik Das, the chief economist, India & South Asia, Deutsche Bank.

"A "neutral stance" will signal that the RBI can hike, pause or cut at a future stage, as guided by the data and transmission lags," Das said.

However, the RBI will be well aware that a softer stance could be read as a signal that inflation is no more a problem, a message it has strongly denied even last week. A neutral stance could lead to markets bringing forward their rate cut expectations and borrowing costs in the economy lower than the central bank’s comfort level.

Also, the MPC may not want to reach a situation where it will have to return to a tighter policy stance if El Nino plays a spoilsport in the central bank’s inflation outlook, poll participants said.

Most analysts expect the central bank to start cutting rates not before Jan-Mar.

The following are the expectations of respondents on the rate action by the Monetary Policy Committee on Thursday: 

End

Written by Pratiksha and Shubham Rana

Edited by Akul Nishant Akhoury

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