RBI Economists at HSBC Plc suggest that an adjustment in the RBI’s policy stance language could set the stage for a quarter-point rate cut in December.
RBI MPC: A police officer strolls by the Reserve Bank of India (RBI) emblem within its headquarters in Mumbai, India. (Reuters)
India’s newly formed monetary policy committee might set the stage for an interest rate reduction on Wednesday, coinciding with a wave of global easing and a slowdown in growth within the world’s fastest-growing major economy.
What is the expected decision of the Reserve Bank of India’s six-member MPC regarding the repurchase rate according to the Bloomberg survey?
In a Bloomberg survey of 35 economists, the majority anticipate that the Reserve Bank of India’s six-member MPC will maintain the repurchase rate at 6.5%. However, several expect a shift to a ‘neutral’ stance for the first time since June 2019, moving away from the current hawkish perspective.
This meeting marks the inaugural session of a new policy committee, which was formed last week with the appointment of three external members, all prominent economists with expertise in academia and finance.
Governor Shaktikanta Das has consistently rejected suggestions for rate cuts, expressing concerns that elevated food prices could hinder inflation from sustainably meeting the 4% target. However, as the US Federal Reserve shifts its stance and other central banks implement rate reductions, the RBI is facing mounting pressure to follow suit, particularly after favorable rainfall and forecasts of a substantial harvest.
Economists at HSBC Plc suggest that a shift in the RBI’s policy stance language could open the door for a quarter-point rate cut in December.
“We believe the RBI has no advantage in delaying further,” Pranjul Bhandari and Aayushi Chaudhary stated in a note. They also anticipate an additional quarter-point reduction at the February meeting, bringing the repurchase rate down to 6%.
What is the significance of the new Monetary Policy Committee (MPC) making its debut?
New MPC Makes Its Debut
The new Monetary Policy Committee has officially convened, welcoming three external members. Among them, only Saugata Bhattacharya, a former chief economist at Axis Bank Ltd., has publicly expressed his opinions on inflation and growth lately, recently advocating for the RBI to implement rate cuts.
However, economists believe it’s improbable that the new members will oppose the three existing RBI officials on the MPC at this early stage.
“They may align with the RBI’s prevailing view for a while,” stated Rahul Bajoria, an economist at Bank of America Corp. “Nevertheless, the incoming near-term data is quite mixed, and growth risks seem to be leaning towards the downside,” he added, forecasting a potential change in policy stance.
In the last two MPC meetings, external members Ashima Goyal and Jayanth Varma supported rate cuts, arguing that the RBI’s commitment to maintaining high rates was detrimental to growth.
What Bloomberg Economics Says
There is a consensus that the Reserve Bank of India should transition from its hawkish stance to a more accommodative policy. Many anticipate the first rate cut will occur in December, while we believe it may take place during the review on October 9. The three new external members of the monetary policy committee, along with RBI officials, are expected to consider recent developments, including a substantial rate cut by the Federal Reserve and increased tensions in the Middle East, which pose risks to supply chains.
Inflation Rhetoric May Be Toned Down
The RBI is expected to maintain its growth and inflation forecasts for the fiscal year at 7.2% and 4.5%, respectively, though adjustments to the quarterly CPI predictions, particularly for the July-September period, are possible, according to Kaushik Das, an economist at Deutsche Bank AG.
The central bank had anticipated 4.4% inflation for this period, but the actual figure may be lower, falling between 4% and 4.1%, he noted.
India experienced its best monsoon rains since 2020, which irrigate nearly half of the nation’s farmland, paving the way for a bountiful harvest of crops like rice and improving economic prospects in rural areas.
Since the last rate decision, official data has indicated that economic growth slowed to 6.7% in the April-June quarter, falling short of the central bank’s forecast of 7.1%, with emerging signs of a decline in urban consumption.
Bond Markets Could Rally
Any indications of dovishness from the central bank, such as adjustments to the policy stance language, could trigger a rally in the bond market. Traders are closely monitoring potential changes that may signal improved liquidity conditions within the banking system. Yields have decreased by approximately 40 basis points from this year’s peak of 7.25% amid expectations of an RBI easing.
“The next move from the RBI will be a rate cut,” stated Nathan Sribalasundaram, a rates strategist at Nomura Holdings Inc in Singapore. “Favorable demand-supply dynamics, banks’ investment needs, and foreign investor interest will drive yields lower.”
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