RBI Monetary Policy Preview: Easing Inflation Sets The Stage For A Prolonged Pause

India's Monetary Policy Committee is likely to continue its status quo on the key lending rate at its second meeting in the new fiscal, amidst easing inflation and resilient growth.

All 18 economists polled by Bloomberg expect the MPC to maintain the status quo on the RBI's repo rate on Thursday. The benchmark policy repo rate is currently at 6.50%.

The evolving growth-inflation mix indicates a continued pause from the RBI in June, according to Indranil Pan, chief economist at Yes Bank Ltd. The upside surprise seen in the latest GDP number for Q4FY23 shows that the economy is resilient even as private consumption expenditure remains on the slow track, he said. While headline CPI inflation has eased and the softening bias is expected to continue,

However, there is still a hawkish tilt to U.S. Fed policy, and other advanced economies' policy rates are expected to continue to rise given that respective inflation levels are still quite high compared to the targets, he said.

"While we expect the RBI to stay on pause in June, the next move is surely a cut. However, we might have to wait until around the February 2024 MPC meeting for this cut," said Pan.

"Amid a gradual decline in inflation and some moderation in growth arising from external headwinds, we expect the RBI to stay on hold through FY24," Rahul Bajoria, chief India economist at Barclays, said in a note. "Guidance on liquidity will be closely watched, but even there, we see the RBI as being more reactive than pro-active."

Retail inflation cooled to its lowest since October 2021 in April, falling within the central bank's target range for the second straight month, raising the bar for further rate hikes. It stood at 4.7% in April as compared with 5.66% in March.

Domestic inflation has been on the decline, slipping below 5% and within the target range. Trends for May suggest inflation could ease further, close to 4% year-on-year, helped by base effects as core and non-core segments soften, said Radhika Rao, senior economist at DBS Bank. Consequently, average April-June 2023 inflation is expected to undershoot the RBI’s forecast by 50–60 basis points, Rao said.

Inflation data until October would be decisively below 5%, according to Soumyakanti Ghosh, group chief economic advisor at the SBI. The October inflation print would be known to the RBI in the December policy, indicating a pause through 2023, he said.

Inflation estimates for FY24 could be downgraded in the upcoming policy, according to Ghosh. Growth remains strong, and the possibility of a growth upgrade for FY24 looks imminent, he added.

The Indian economy grew 6.1% in January–March 2023, a step up from 4.5% in the previous quarter, according to the latest GDP growth estimates released by the government last week. For FY23, the GDP is estimated to have grown 7.2%.

A delay in the onset of the southwest monsoons will have an impact on domestic food prices and rural demand, according to a note by the Bank of Baroda. However, the RBI will await more details on the status of actual rainfall before taking any action.

Banking liquidity was in surplus, rising to the tune of Rs 2.6 lakh crore by the beginning of June.

The domestic banking system's liquidity is expected to remain flush with the RBI’s decision to withdraw Rs 2000 notes, the recent variable rate repo auction, and a flat balance of payments this year, according to Goldman Sachs. Given this and with considerable uncertainty around the commodity price path and global growth, the RBI is likely to retain the liquidity tightening stance, as signaled by the comment that the MPC will "remain focused on withdrawal of accommodation," it said.

Since the last policy, yields on the benchmark 10-year G-sec have fallen sharply by over 20 basis points and are currently trading closer to the 7% mark. A possible pause by the U.S. Fed and a decline in international oil prices have helped, Sonal Badhan, an economist at the Bank of Baroda, said. In addition, the reduced need for the RBI to infuse liquidity into the system has also taken off the pressure.

The Indian rupee has depreciated by over 0.3% since the last MPC policy on account of a strong dollar. It is still hovering well above the Rs 82/$1 mark.

Risk-averse sentiments that persisted during May due to the risk of U.S. debt default and the probability of a rate hike by the Fed have now begun to fade given the dovish comments from Fed officials, which indicate that the Fed might pause in June, Badhan said. Further, a lower trade deficit, FPI inflows, and lower oil prices will also support the rupee, he said.

The Indian rupee is likely to trade in the Rs 82–83 range for the next fortnight, Badhan said.