comment from Siddhartha Sanyal, Chief Economist and Head Research, Bandhan Bank on RBI monetary policy announced today.
QUOTE: Attribution – Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank
Today’s status quo on the repo rate was on expected lines. The central bank recognized India’s resilient macro backdrop leading to greater policy space for the RBI. However, the central bank does not seem to be in any rush to start cutting the repo rate.
While the RBI kept the FY25 CPI forecast unchanged at 4.5%, interestingly, for the first two-quarters CPI was further lowered, potentially to a sub-4% zone. That will push the real repo rate (ie., the difference between the repo rate and inflation) beyond 2% for a while, strengthening the case for repo rate cuts later this year.
However, the timing of RBI rate easing will involve several other factors. Most of the major global central banks appear to be cautious to start easing policy rates. While the US Fed is expected to start easing rates in June, such expectations altered several times in recent months and are far from certain. Against that backdrop and given that the RBI’s legroom for the repo rate from the current 6.50% is likely limited to only 50-100 basis points, one maintains that a rate cut by RBI is unlikely before August.
While the MPC decided to keep the stance of the policy unchanged today, one sees merit in considering changing the stance of monetary policy to “neutral” sooner than later. The MPC adopted “withdrawal of accommodation” as the stance of monetary policy since April 2022. Since then, policy rates were pushed higher till February 2023. For the next one year, the RBI absorbed a large quantum of excess liquidity from the banking system. However, now the RBI will likely move sideways for a few months both on the rates and liquidity front. Accordingly, one feels that the case for a change in policy stance to “neutral” in the coming MPC meetings is stronger now.