SBI expects rate pause, growth upgrade in RBI's upcoming MPC

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) is expected to maintain the repo rate at 6.50 percent in the upcoming meeting, according to the State Bank of India (SBI). The SBI believes that the repo rate will remain unchanged, and it also anticipates a possible downgrade in inflation estimates for FY24.

The SBI's prelude to the MPC meeting suggests that the RBI will opt for a pause in its June policy. The report acknowledges the RBI's decision to temporarily keep rates unchanged as a bold move due to the risks of banking failures and potential contagion in the markets. The report also mentions that the stance of the RBI could lean towards the withdrawal of accommodation, considering the significant surplus liquidity.

Liquidity surplus has increased, with Net LAF absorption at Rs 2.4 lakh crore as of June 1, compared to a surplus of Rs 2.1 lakh crore at the start of the fiscal year. The report predicts further liquidity increase in the coming months due to the deposit of Rs 2,000 notes. Inflation data until October is expected to remain below 5 percent, and the report suggests a potential downgrade in inflation estimates for FY24 during the June policy. The report highlights strong economic growth and the likelihood of an upgrade in growth projections for FY24.

In terms of market intervention, the SBI proposes that the RBI may adopt a tactical shift by using buy swaps to neutralize liquidity and allow the Rupee to find its own level. Additionally, the report mentions the possibility of a rate hike by the US Federal Reserve in June, followed by a pause.