Status quo on repo rate more likely this time

With the persistent risk of inflation exceeding the upper limit of 6%, the possibility of a rate cut may only materialize in the latter half of this fiscal year, once inflation shows signs of further moderation - Dhruv Agarwala, Group CEO, Housing.com, tells Bizz Buzz

Keeping Fingers Crossed

• Status quo will signify commitment to stable interest rates
• It’ll support robust growth in housing sector
• Latest credit growth reveals sustained pick up in agri, MSME & Services
• Core retail inflation fell from 7.09% in April 2022 to 3.76% in Dec 2023

Mumbai: The Reserve Bank of India (RBI) is expected to maintain the repo rate at its current level when it announces its bi-monthly monetary policy today (February 8). This decision reflects the central bank’s cautious approach as it navigates the delicate balance between promoting economic growth and keeping inflation in check.

Talking to Bizz Buzz, Dhruv Agarwala, Group CEO, Housing.com, PropTiger.com & Makaan.com, said: “With the persistent risk of inflation exceeding the upper limit of six per cent, the possibility of a rate cut may only materialize in the latter half of this fiscal year, once inflation shows signs of further moderation.”

Maintaining the status quo on the policy rate signifies a commitment to stability in interest rates. This stance will provide continued support for the robust growth seen in India’s housing sector, ensuring that the momentum is sustained.

On the banking front, deposit growth has rebounded, but sustained credit growth momentum has increased. As on January 12, all scheduled commercial banks saw credit grew by 20.3 per cent (16 per cent in the same period last fiscal) and deposits by 13.1 per cent (10.6 per cent in the same period last fiscal). Latest credit growth numbers reveal a sustained pick up across agriculture, MSME & services.

On a positive note, average core inflation (CPI excluding food and fuel) which was extremely sticky during 2021 and 2022 (6 per cent average) has eased sharply to five per cent in 2023. Even from the high of 7.09 per cent in April 2022, core CPI inflation has declined to less than 4 per cent in December 2023 (3.76 per cent).

Traditionally, the urban core CPI inflation is lesser than the rural core CPI inflation, a behavioural shift looks the likely reason for the fall in core CPI. At all-India level, while CPI inflation declined by 210 bps to 5.69 per cent in December 2023 as compared to April 2022 level, during the same period the weighted contribution of core CPI was declined by 159 bps. Said SBI group’s Chief Economic Advisor Dr Soumya Kanti Ghosh: “If this is sustained, the decline in core inflation could become more enduring in nature, opening up space for policy rate cuts.”

When we analyze the item-wise decline in weighted contribution of core CPI, the results are astounding, he added.

Since the decline in core inflation is visible in both rural and urban areas and in goods and services that are quintessential to the day-today living, thus to confer that core decline leads to a demand slowdown is might be a misnomer, he added.

Madan Sabnavis, Chief Economist, Bank of Baroda, said: “The MPC is likely to maintain an unchanged approach in terms of both rate and stance.”

This is so as inflation, as per the December data, is still high and there are pressures on the food side, he added.

This is notwithstanding the fact that core inflation has come down. Going by RBI’s forecasts on inflation, it would remain above 5 per cent till June end and come down subsequently. Also with growth being robust, there is less pressure to think of a rate cut at this time. In fact, RBI has indicated that the transmission of the 250 bps cut in rates is still not complete and hence there is reason for a pause.

However, it would be interesting to see if there are any revisions in the forecasts of GDP and inflation for FY24. Also some sense on how GDP growth would turn out in FY25 will be useful given that the budget has outlined the contours, experts said.