RBI Policy: Who expects what from the MPC on Dec 8

Informist, Monday, Dec 4, 2023


MUMBAI – The following are expectations of economists, treasurers, and mutual fund managers from the Reserve Bank of India's Monetary Policy Committee, whose meeting begins on Tuesday, with the decision due on Friday:



Despite stronger growth, core disinflation has continued, which is likely a comfort for policymakers. The macro environment of resilient growth, anchored core inflation, but high food inflation creates the setting for an extended pause.


However, we believe the RBI will persist with its hawkish talk (emphasising that it is serious about the 4% target) and walk (via tighter liquidity). That said, if our forecasts for FY25's growth and inflation outlook materialise (i.e. growth disappoints below the RBI's projection of 6.5%, and headline inflation trends closer to core in H2 2024), then the policy bias should gradually shift towards easing.


Our baseline view is 100 bps of cumulative policy rate cuts. However, amid resilient near-term growth, we are pushing out the timing of the first cut to August (from April).



We expect the Monetary Policy Committee to remain on a cautious hold and keep the repo rate unchanged at 6.50%. The central bank may flag risks to inflation from a potential recurrence of food price shocks and its impact on inflation expectations, even as it draws comfort from the moderation in core inflation.


Instead of the rate setting channel, the RBI's focus now seems on using other instruments in its monetary policy toolkit, including liquidity management and macro prudential measures, to facilitate the transmission of earlier rate hikes and to curb risky lending behaviour, respectively.


We think the RBI may raise its annual growth forecast modestly, but is likely to keep its inflation forecasts unchanged, citing uncertainty around the near-term outlook due to possible changes in domestic food and international energy prices.



With the strong Jul-Sep GDP print and upside risks to near-term inflation prints due to food price volatility, the RBI is likely to remain hawkish in the upcoming monetary policy.


RBI will likely increase FY24 GDP forecast to 6.8%, from 6.5% earlier, while holding the FY24 CPI forecast unchanged at 5.4% (as food inflation will come off sharply in Jan-Mar'24, after picking up in Oct-Dec'23).


Since effective short-term interest rates are already higher at 6.85-6.90% levels as against the repo rate at 6.50% and the standing deposit facility (SDF) at 6.25% (which is the floor), one option for the central bank could be to raise the SDF rate by 10-15 bps and narrow the corridor with the repo rate, which would be reflective of the central bank's hawkish stance, without hiking the repo rate.


We forecast RBI to cut the policy repo rate by 75 bps in 2024 and another 25 bps in early 2025. Earlier, we were expecting 100 bps repo rate cut in 2024 itself, starting from April, but given that the US Federal Reserve is likely to start cutting rates from June, we have pushed back the start of the rate cut cycle to June.



The RBI's rate-setting panel is currently in a "wait and watch" mode as it awaits clearer signals on the inflation trajectory.


Though CPI has moved within RBI's target range of 2-6% in the past two months, it continues to face upside risks from food prices. Uneven monsoon has lowered kharif production this year (based on the government's first advance estimates), and lower reservoir levels could hit rabi output too. Globally, food supplies remain tight and the risks from El Nio are brewing again. We expect CPI inflation to average 5.5% in fiscal 2024, above RBI's mid-point target of 4%.


Besides, the RBI has also observed that transmission of past rate hikes is incomplete.


We expect RBI to use liquidity management tools rather than rates in the remainder of this fiscal to facilitate transmission of rate hikes. Liquidity has moved in slight deficit, consistent with MPC policy stance.



Compared to the last monetary policy, this time macro backdrop looks better. Crude oil prices have come down, inflation has cooled off, global interest rates are significantly lower, and more importantly, the US Fed doesn't look that hawkish now.


The RBI can also take comfort from the sharp fall in core CPI inflation which is now getting closer to the RBI's target of 4%. We expect the RBI to maintain status quo on rates. However, given the significant improvement in the macro picture, there is a case for the RBI to become less hawkish in its statement.


In this policy, we would also expect the RBI to provide clarity about its liquidity management strategy which has been a little confusing over the last two months. Despite banking system liquidity being in large deficit, the RBI is not conducting any variable rate repo operations. This in turn has pushed the banking system to borrow at a higher interest rate under marginal standing facility.



We agree with consensus expectations that the MPC will keep policy unchanged at the conclusion of its meeting on Friday. 


Further ahead, robust economic growth and upside risks to inflation mean the central bank will be in no rush to loosen policy, and we have pushed back our expectation of the start of the easing cycle to the second half of 2024. That would be a lot later than in most other major emerging markets. 


The economy is holding up exceptionally well and doesn't appear in need of imminent policy loosening. The GDP data for Jul-Sep came in remarkably strong. The economy is also benefitting from the government's ramping up of infrastructure spending. 



RBI is expected to stay on pause in the December meeting and keep stance unchanged–withdrawal of accommodation.


Moreover, in November, vegetable prices have risen once again, led by onions. CPI inflation is expected to remain above 5% till Apr-Jun of the next financial year, which is higher than the 4 target. Hence, we expect RBI to remain on a prolonged pause and don't expect the stance to change anytime soon.


RBI is likely to revise its 2023-24 (Apr-Mar) GDP forecast upwards after the stronger than expected print for Q2 and their nowcast model indicating growth remains on the stronger side in Oct-Dec. RBI is likely to revise up FY24 GDP forecast to 6.8%


On liquidity front, we don't expect OMO sales (via auction) as liquidity conditions remain tight. We expect core liquidity to reduce further to 1.7 trln rupees as December-end, without intervention from RBI. 


RBI is likely to keep liquidity conditions on the tighter side to ensure transmission of past rate hikes and focus will remain on keeping weighted average call rate closer to MSF rate.  End


Compiled by Vaishali Tyagi

Edited by Aditya Sakorkar


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