RBI policy
It is widely anticipated that the RBI MPC will maintain the repo rate at the current level of 6.5 percent. This would mark the sixth consecutive time when the rate remains unchanged. The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) held a three-day meeting after the interim budget for the first policy decision of the calendar year 2024 and the last one of the financial year 2024. It is widely anticipated that the committee will maintain the repo rate at the current level of 6.5 percent. This would mark the sixth consecutive time when the rate remains unchanged. The decision will aim to support the objective of achieving a consumer price-based inflation (CPI) target of 4 percent. The MPC may keep the repo rate unchanged at 6.5% this week, but may soften its monetary stance to ‘neutral’ from ‘withdrawal of accommodation’. This would be consistent with some softening seen in the domestic economic momentum, and rapid fiscal tightening. However, we do not expect any discussion/guidance on the path and timing of rate cuts just yet. In our view, rate cuts are still distant. After all, headline CPI is still elevated and the RBI seems committed to taming CPI to 4%. That said, the RBI’s actions/guidance on the liquidity front would be closely watched,” said brokerage house Nuvama in a recent note.
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Economic growth: According to Research Analyst at LKP Securities, the economy is likely to grow at 7.3% driven by strong investment growth (projected to grow by 10.3%). Industrial growth may expand by 7.9% in FY24 against 4.4% in the previous year. However, the significantly slower growth of consumption demand, which contributes 50% of GDP, raises concern. The agriculture sector is also facing headwinds because of below-average rainfall. Overall the real GDP numbers are likely to stay robust. Against the backdrop of improved economic outlook, the RBI is likely to increase the growth projection for FY24 to 7.3%,
Inflation: further stated that the headline inflation was at the higher side of 5.7% in December, driven by higher food prices (especially, pulses, legumes, and spices). However, core inflation is stable at below 4%.
Liquidity management: In the upcoming MPC meeting, the RBI is anticipated to sustain its emphasis on liquidity management, given tight money market conditions where the call money rate hovers over the repo rate.
Domestic demand: According to Nuvama, rural demand has failed to recover, and some high frequency indicators such as CV sales, electricity generation, fuel consumption, government spending and businesses’ top-line growth have moved to a slow lane. Furthermore, the latest Union Budget points towards steep fiscal consolidation in the coming year, with the Centre’s total spending growing at just 6%, much below the NGDP growth. Against this domestic backdrop, the global monetary backdrop is one where most major central banks have indicated the end of the tightening cycle, although the pace and timing of rate cuts remain rather uncertain.
Fiscal balance: Narrowing the fiscal deficit target, the government indicated that populist spending or incentives may be avoided in preparation for the forthcoming general election, further noted Kabi.
External situation: CareEdge, in a recent report, pointed out that the external environment remains favourable, with narrowing trade deficits and robust foreign exchange reserves. In December, the goods deficit reached a 5-month low of $19.8 billion. Projections for the overall current account deficit for FY24 indicate a modest figure of 1.2% of GDP. The cumulative Foreign Portfolio Investment (FPI) inflows for the calendar year 2023 stand at USD 28.7 billion. Anticipated factors such as India’s inclusion in the JP Morgan bond index, potential incorporation in Bloomberg EM Local Currency indices, and the robust performance of the domestic economy are expected to sustain FPI flows in the future, it added.
In conclusion, the economic outlook remains healthy. As core inflation and wholesale inflation are steady, the headline inflation is likely to settle down in the coming periods with the arrival of Rabi harvests.