The Reserve Bank of India’s (RBI) six-member monetary policy committee (MPC) is likely to maintain status quo on repo rate at 6.5% in its forthcoming meeting scheduled between February 6 and 8, 12 economists polled by FE said. Around 40% of economists felt the MPC may pivot to rate cuts only from Q2FY25 onwards, while 25% believe that it may happen even later in the second half of the financial year.

“We expect the MPC to extend its pause in February to take stock of the domestic inflation outlook and global developments. With the US Federal Reserve still non-committal on their policy pivot, the RBI MPC is likely to avoid a pre-emptive dovish shift,” said Radhika Rao, ED and senior economist at DBS Group Research.

According to Rajani Sinha, chief economist at CareEdge Ratings, despite core inflation easing below the 4% threshold, concerns persist over the volatility in food prices, particularly given the lower anticipated Kharif output and delayed Rabi sowing.

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“The First Advance Estimate (FAE) places India’s GDP growth at 7.3% for FY24, following a 7.2% growth in the preceding fiscal year. The current fiscal year’s growth has been buoyed by robust investment demand. Industries and services sectors are both anticipated to sustain momentum,” she said.

Sujan Haria, chief economist at Anand Rathi brokerage, shared similar views. He said though there has been a substantial and earlier than anticipated reduction in inflation, there are persistent strong growth impulses as well. Moreover, geo-political tensions, along with potential supply chain disruptions, pose upside risks to inflation.

India’s core consumer price index (CPI) inflation fell to a 48-month low of 3.9% in December from 4.1% in November, while CPI inflation rose to a four-month high of 5.69% from 5.55% during the same period.

Though the majority of economists polled say the MPC is unlikely to change stance from withdrawal of accomadation to neutral, some argue that liquidity deficit has touched multi-year high in last month and this warrants a change in stance. After touching an all-time high of Rs 3.4 trillion last month, the liquidity deficit in the banking system eased to Rs 2.4 trillion on Thursday

For instance, Sinha says possibility of change of stance to neutral cannot be ruled out as core inflation moderated to below 4% first time since pandemic, systemic liquidity has been in deficit since first week of December 2023, and RBI is constantly trying to ease liquidity conditions through variable rate repo (CRR) auctions.

IDFC First Bank India Economist Gaura Sengupta, however, said the stance change would be a close call. With call rate remaining at marginal standing facility (MSF) rate since October, the liquidity conditions remain tight and are likely to stay so due to pickup in currency leakage and strong tax collections.

“Only by March-end or April some easing in system liquidity can be expected with pick-up in government expenditure. However, from a signalling perspective it might be premature to change the stance to neutral in February, as we expect rate cuts to start from August onwards,” she said.

Achala Jethmanlani, economist at RBL Bank, said given the current tight liquidity situation, the bank expects the RBI to provide insights into liquidity management strategy, more so as banks head into financial year-end where credit off take is higher.

“We could expect a VRR auctions’ schedule which would help assuage seasonal liquidity pressures and keep money market rates anchored to the operating policy rates. At present the Call rate itself is hovering at 6.86% with the repo rate being at 6.50%,” she said.

While VRR auctions will help addressing liquidity challenges, the instrument is only used for shorter tenures, and banks need open market operations (OMO) by the RBI, said Madan Sabnavis, chief economist at Bank of Baroda.

“What we need are OMOs, but that does not seem to be forthcoming unless the RBI announces the same in the policy. Presently it does look like that the RBI is satisfied with the VRR approach,” he said.
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