Rate cut appears remote until next February

The monetary policy committee (MPC) of the RBI is not in a mood to go for rate-cut until next February. The MPC left the repo rates unchanged at 6.5 per cent at its meeting on June 8 and continued with the ‘withdrawal of accommodation’ stance, as liquidity has become a surplus, and the impact of deposits of Rs 2000 notes. A change in policy stance at this juncture might not be in sync with the current liquidity conditions, analysts opine. Headline CPI is still higher than the medium-term target of four per cent, even on a 12-month forecast horizon. A sustained moderation in inflation may prompt the shift from a ‘withdrawal of accommodation’ to a ‘neutral’ stance. Experts believe that we are on a prolonged pause in India (unless there are some external shocks and El Nino conditions). India’s retail inflation eased 20-month low to 4.7 per cent in April on account of the high base effect supported by softening in overall food prices. Trends for May suggest inflation could ease further, which can be seen from the sharp downward revision of the Q1FY24 inflation forecast by the RBI. The impact of the favourable base effect on inflation is likely to continue in the coming few months. There is a high probability of El Nino developing during the latter part of the monsoon. Although El Nino episodes in the past have not always led to a substantial rise in food inflation, this cannot be ruled out.

Notably, input price pressures have receded sharply, hinting at the possibility of core goods CPI moderating, and services inflation also remaining soft. Given the uncertainties around the prevalence of El-Nino conditions leading to sub-par monsoon in 2023, RBI remained cautious and revised the inflation projection down by only 10bps to 5.1 per cent for FY24. Normalisation of the base, slowing external demand, and uncertain financial conditions would take real GDP growth to 6.5 per cent in FY24 (RBI projection). Weaker global growth, lagged impact of RBI’s rate hikes and the development of El-Nino conditions during the monsoon season are the critical risks to GDP growth in FY24.

Headline inflation across countries is on a downward trajectory, but is still high and above the targets. Longer than expected rate hikes would increase the interest rate differential, making things difficult for emerging markets' central banks like RBI to cut rates in the near term. This was clearly echoed in the RBI Governor’s statement. He also reiterated the focus to achieve the inflation target of four per cent. The resolve by the RBI to do ‘whatever is necessary’ to bring inflation down on a sustained basis to the median target is likely to push forward rate cut expectations perhaps next February but that would be data-dependent. The policy statement was a non-event from the equity markets perspective. These all are indicative of a prolonged rate-cut.