Changes in policy rate or stance unlikely in MPC meet

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will meet over June 5-7 to review the policy repo rate and communicate the policy stance as well. Since the last meeting of MPC, geopolitical volatility has risen in the first fortnight of April, and though it appears to have subsided, the underlying tensions continue to simmer, which can be felt all over. Furthermore, global markets now anticipate the Fed to be on a ‘longer than anticipated hold’ as compared to March. Thus, in the current environment, though India’s headline inflation is expected to moderate further, analysts feel that the RBI is unlikely to make changes to both – policy rate as well as the stance of the policy. Let us look at it in the perspective of GDP growth too. While the growth in GDP and GVA moderated to a four-quarter low of 7.8 per cent and 6.3 per cent, respectively, it exceeded market expectations in Q4. The wedge between the two narrowed only slightly to 148 bps from 178 bps in Q3, amid the high 22.2 per cent growth in net indirect taxes in real terms.

With such a high growth of net indirect taxes unlikely to sustain in FY25, Icra expects GDP and GVA growth to print closer to each other, especially in terms of the annual numbers. The sequential deceleration in GVA growth was largely driven by the industrial sector, reflecting both a moderation in volume growth and narrowing deflation in industrial raw material inputs in Q4 vis-à-vis Q3. Amid these developments, expansion in manufacturing and construction remained quite robust, printing at above eight per cent in the quarter. The lingering impact of the 2023 unfavourable monsoon was reflected in the performance of the agri sector, which just eked out a 0.6 per cent YoY rise in Q4. The good news is that monsoon has already hit Kerala and the only expectation is that it should get distributed evenly across the country, which will be a good augury for the economy. In fact, this factor was echoed in the April MPC meet.

An expected normal south-west monsoon should support agricultural activity, the RBI had said in the post MPC meet statement. Experts hope that the MPC will keep the policy rate unchanged at 6.5 per cent, while also maintaining its ‘withdrawal of accommodation’ stance. The reason is not far to seek. The system liquidity is expected to ease after the formation of a new government, which will resume spending. The headline CPI may remain sticky due to the volatile food inflation. Any rate cut depends on CPI moving towards four per cent on a durable basis and is also contingent on US FOMC decision. Fiscal consolidation, upgrade of S&P's Indian sovereign rating outlook to positive, inclusion of India in JPM bond index from the current month, are all positive developments for the bond markets, One can only hope that the MPC will factor in all these factors, this time around.