RBI MPC Meeting Expectations: Will It Cut The Repo Rate This Time?
RBI will conclude its monetary policy committee meeting tomorrow, October 09, 2024.
RBI will conclude its monetary policy committee meeting tomorrow, October 09, 2024.
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The Reserve Bank of India (RBI) will conclude its bi-monthly monetary policy committee (MPC) meeting tomorrow, October 9, 2024. While there have been expectations of a rate cut, the latest conditions in the market no longer warrant an immediate rate cut, so that may be delayed further. RBI last changed the repo rate from 6.25 per cent to 6.50 per cent in February 2023.
The repo rate is vital because it impacts the bank deposit and lending rates. Although retail inflation has risen marginally from 3.5 per cent in July to 3.7 per cent in August, mainly due to food inflation, it remains a concern. RBI is expected to cut the repo rate to spur economic growth as retail inflation has reached its comfort zone of around four per cent.
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However, RBI still needs to make a clear timeline for that. Experts believe the rates could come down in the last quarter of 2024 or the first quarter of next year.
According to the Bank of Baroda’s report’ Economic Round-up: September 2024’, by Sonal Badhan, issued on October 1, “The outlook for food inflation is positive as the progress of monsoon has been adequate. Soft global commodity prices will also have a sobering effect on core inflation, which will likely remain comfortable. Overall, we expect inflation in the range of 4.5 per cent to 5 per cent in FY25. RBI is likely to be cautious and wait for a durable moderation in inflation before cutting rates. We see the possibility of a rate cut only in December 2024, provided the durability of low inflation is established by data.”
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Dipanwita Mazumdar, economist, Bank of Baroda, in a report ‘Inflation may surprise on the upside’ issued on October 5, 2024, says that core inflation may also see an upward correction amidst revival in rural demand due to improved sowing. Along with the festive demand and currently higher gold prices working as an effective hedge amidst geopolitical conflict, it might pose an upside pressure on core inflation in the near term. “We expect CPI to settle around 5.1 per cent in September 2024, with risks tilted to the upside”, reads the report.
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However, interest rate decisions are not based solely on domestic circumstances but on global events. While the interest rate is a tool to manage inflation, it is impacted by several factors, such as the demand and supply of money, government borrowings, value of money, etc. Also, various other factors that make the interest rate decision more complex can impact inflation, such as oil prices, higher cost of goods and services, geopolitical tensions, inflation expectations, etc.
Suresh Darak, founder and director of Bondbazaar, a bond trading platform, points out the domestic and global events that can impact rate-cut decisions. “In August’s monetary policy, the RBI projected consumer price index (CPI) at 4.5 per cent in FY2025 (vs 5.4 per cent in FY2024) and real gross domestic product (GDP) at 7.2 per cent for FY2025. Inflation remained a point of concern, particularly with food and fuel prices. Food inflation, with a weight of around 46 per cent in the CPI basket, remains an important monitorable for policymakers.”
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Another point he highlights is that besides the US Fed rate cut, other major economies, like the Euro Zone, the UK, and China, have also undertaken rate cuts in the last couple of months to cool off inflation. “But, the last weeks surprised the global financial landscape with the Iran – Israel geopolitical turmoil, which has led to uncertainty and crude oil price jumping up, and the US payroll data surging more than expected (pointing to inflation fears)”.
Darak states, “We expect the MPC to keep rates unchanged despite the US and other major economies undertaking them, given the geopolitical turmoil that has led to uncertainty, lower deposit growth than credit growth, and rising crude oil prices. This gives investors an opportunity to lock in current rates through fixed income investments, especially before the next policy in December 2024, when we could potentially see a 25 basis point rate cut owing to cooling retail inflation and global economic slowdown.”
While MPC will consider all these factors before announcing the repo rates on October 9, investors and depositors need to keep abreast of the changes in the financial landscape and make investment decisions accordingly.
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