RBI policy statement ‘pragmatic’, ‘cautious’; expect no rate cut till Q4: SBI

The Reserve Bank of India (RBI) will likely announce the first repo rate cut of about 25 basis points in Q4 FY24 as the GDP growth is expected to decline to 5.7% in that quarter from 8% in Q1 FY24, SBI Research says in its latest report. "With GDP growth in FY24 set to decline from 8.0% in Q1 to 5.7% in Q4, we pencil in the first rate cut by RBI in Q4 FY24. The magnitude could be larger than 25 bps," it adds.

As widely expected, the RBI-led MPC decided to keep the repo rate at 6.50%. It also decided to remain focused on "withdrawal of accommodation" to ensure inflation progressively aligns with the target, while supporting growth, though not unanimously.

"Overall, the RBI policy statement is cautious and pragmatic and is clearly aimed at managing expectation build-up of a rate cut not any time soon," writes Soumya Kanti Ghosh, group chief economic adviser, State Bank of India. The emphasis on 4% is to clearly anchor the market expectations for the future, he says.

The central bank revised downward its inflation projection for FY24 by 10 bps to 5.10%. The RBI's quarterly inflation projections are -- Q1 at 4.6% (earlier: 5.1%), Q2 at 5.2% (earlier: 5.4%), Q3 at 5.4%, and Q4 at 5.2%. The inflation trajectory is likely to be shaped by food price dynamics, says the SBI Reacher report, adding that milk prices may pose a threat also due to supply shortfalls.

"The inflation trajectory is now conditional on spatial variation of monsoons and possible development to ENSO."

On GDP, the central bank retained its projection at 6.50% for FY24, with Q1 at 8% (earlier: 7.8%), Q2 at 6.5% (earlier: 6.2%), Q3 at 6.0% (earlier: 6.1%) and Q4 at 5.7% (earlier: 5.9%). The central bank believes higher rabi crop production, expected normal monsoon, and sustained buoyancy in services will drive growth in FY24. It is interesting to note that list of positive factors influencing growth as stated in the RBI policy statement outweighs the negative factors in the same, says the SBI report.

"Importantly, the series of RBI rate hikes have resulted in a combination of the declining unemployment rate and stabilising vacancy rate over the period of the RBI rate hike cycle. This signifies that RBI’s rate hikes have been able to successfully trim the excess labour demand in the market without contraction in employment."

Saying the regulatory changes announced in the policy statement are "positive", SBI economists have ruled out a "rate cut any time soon", though they emphasise rate cuts in the past have happened over the cycle. For example, as growth weakened from 8% in FY16 to 6.8% in FY18, the RBI cut rates by 200 basis points. "With GDP growth declining from 9.1% in FY22 to 6.5% in FY24, will this be construed as a signal of growth slowdown and hence future rate actions by RBI?"

Weak external demand, geo-economic fragmentation, and protracted geopolitical tensions, however, pose risks to the growth outlook, the report adds.