MPC meet: RBI likely to change 'stance' but continue rate cut pause until Dec

The Reserve Bank of India (RBI) will kick off its three-day deliberations on monetary policy today i.e. October 7, 2024. Governor Shaktikanta Das, who'll announce the committee decisions on October 9, is expected to maintain the 'status quo' on repo rates, though a change in stance is likely.

There are three key factors being attributed to it -- softer growth numbers that have trickled in recently, inflation has fallen, and the external environment has moved from rate hikes to cuts. HSBC says the RBI doesn't gain from waiting any longer. "We think it will change its stance from a hawkish 'withdrawal of accommodation' to 'neutral' in the upcoming 9 October policy meeting, followed by repo rate cuts of 25bp each in the December and February meetings, taking the repo rate to 6%. But, first, let's discuss the key changes around us."

In its last meeting in August, the RBI had kept the benchmark "repo rate" unchanged at 6.5%, a record ninth time straight. It also maintained the status quo on the "withdrawal of accommodation stance". But, in a surprising move, the U.S. Federal Reserve last month also cut interest rates by a half-point for the first time in four years since the pandemic’s early days in 2020. The policy decision marked a major shift in the U.S. Fed’s fight against curbing inflation.

There has been a "softness in growth", especially in the more urban sectors. "The latest GDP, PMI manufacturing, motor sales, cement production, bank credit, corporate tax collections, GST revenue growth and goods exports, have been softer than before," HSBC's India RBI Watch report says.

Some leading indicators of growth are looking up. "Government cash balances are high, temperatures have normalised, and private sector investment intentions have risen. As the softness is noted across several indicators, we think it deserves some attention."

Amid the slower underlying inflation, the report says core inflation will likely remain 'soft' as long as global excess capacity keeps prices low. "We forecast inflation to fall gradually to the 4% ballpark by March 2025. After falling steadily, inflation is likely to tick higher in September. But that doesn't have us overly concerned, because it is led largely by base effects. We forecast inflation to fall gradually to the 4% ballpark by March 2025."

With monetary policy loosening in several advanced economies, the RBI, too, seems to have revealed a preference for 'looser' liquidity, says the report. As a next step, it says a risk to the change in stance is that a further spike in oil prices in the next few days pushes out the change to December. "Either way, we think the rate-cutting cycle that follows will be a shallow one, with an aggregate of 50bp in easing. This aligns well with our real rate calculations."

Rate cut likely in Dec: SBI Research

In its prelude to the MPC meeting, SBI Research says the first rate cut could likely be in December 2024 or Feb 2025. "…any disintegrated rate cut and change in stance could front load market movements one way up… We however believe a possibility of growth slowing down incrementally with the leading indicators showing a declining momentum and increasing geo-political risk might prompt a rewording of communication from RBI highlighting the need to have a balanced growth inflation balance."

The note says deposit growth is finally outpacing credit growth at least on a year-to-date or YTD basis as incremental growth in credit is lower by a sharp ₹7.5 lakh crore but deposits lower by Rs 2.7 trillion. "On a yearly basis, however, the gap between credit and deposit growth still persists though now down to only 220 basis points and is the lowest since credit and deposit growth had started diverging since FY23."