WHAT THE OCTOBER RBI POLICY STATEMENT FOCUSED ON
The October monetary policy was special as it came just about 3 weeks after the US Federal Reserve had cut rates by an aggressive 50 basis points. In addition, the Fed had guided for another 50 bps rate cut in 2024 and an additional 100 bps in 2025. However, the RBI stood its ground on the strength of the argument that the risk-reward trade-off for a rate cut was not yet favourable. While 5 members of the MPC agreed over the decision to maintain status quo on rates, Dr Nagesh Kumar (a new MPC inductee) voted for a 25 bps rate cut.
It is not often that you see an MPC member giving a dissent vote in their very first MPC meeting, but his perspective was that the RBI may be imposing low growth on the economy by delaying rate cuts. However, the October policy did make a small start by shifting the stance of the monetary policy to Neutral. For now, it is not clear if this is a signal of surplus liquidity in the system or an indication of rate cuts in the near future. For now, the former looks like a more plausible explanation. The MPC kept other projections pertaining to GDP growth and consumer inflation static at 7.2% and 4.5% respectively for FY25.
A NEW LOOK MONETARY POLICY COMMITTEE
The October 2024 MPC meet saw 3 new inductees in the MPC. Shashank Bhide, Ashima Goyal, and Jayanth Varma had completed their 4 year term at the MPC. In their place, the 3 new inductees included Prof Ram Singh, Director, Delhi School of Economics; Saugata Bhattacharya, former chief economist, Axis Bank; and Nagesh Kumar, Chief Executive, ISID. Among the new members of the MPC, all three members voted for a change in stance of the policy from “gradual withdrawal of accommodation” to a “Neutral” stance. However, the vote on rate action was not exactly unanimous.
While the other five members of the MPC voted to keep status quo on rates, Dr Nagesh Kumar of the ISID put up a dissent note and called for a 25 bps rate cut. According to Nagesh Kumar, there were visible signs of stress in corporate India as manifested by weak profit growth and thinning operating markets. Cost of debt was also becoming a challenge. In addition, Nagesh Kumar also added that the contraction in the core sector and IIP for August 2024 were a warning signal to be heeded. For now, the rate trajectory is not too clear.
WHAT CHANGED BETWEEN OCTOBER 2024 POLICY AND THE MINUTES
The October monetary policy statement was presented on October 09, 2024 and the minutes have been published on October 23, 2024. In this intervening fortnight, we have seen some very interesting data points crop up. Here are 5 data points that had an impact in the last 15 days since the monetary policy statement by the RBI.
In retrospect, the RBI was justified in its concerns over inflation. After two months of tepid inflation reading, it has bounced back to above 5%. However, the big question mark is on the high frequency growth indicators. Even PMI manufacturing and PMI services are giving signals of the momentum of growth slackening. A lot will depend on whether the RBI MPC believes that this growth problem is serious enough to warrant a rate cut. After all, if the inflation spike dents real GDP growth, the entire purpose gets defeated.
“GDP data suggests a slowdown from 8.2% in FY24 to 6.7% in Q1FY25; with full year projection at 6.9%. Core sectors like cement, steel, and chemicals contracted in last 2 quarters despite capex push by government. Cost of finance surged since March 2022 when RBI rate hikes started. Not just jobs; even overall, economic conditions worsened in FY25.”
According to Nagesh Kumar, while inflation should remain a priority, the worrying signals on the growth front must not be ignored. According to Nagesh Kumar, the real problem may still not be the GDP numbers. The nominal GDP is still higher so economic activity is showing strength. However, the month of August saw the core sector output and the IIP contract after a long gap. There is some impact of the lower central capex growth and also some impact of weak consumption signals from India and abroad. According to Nagesh Kumar, this pressure on growth is a concern on the back of steady capex over the last 3 years.
The real issue, according to Nagesh Kumar, may be demand deficit at domestic and global level. This is discouraging fresh private investments. Also, focusing too much on inflation at this point would be tantamount to forsaking future growth in the economy. Nagesh Kumar voted for a Neutral stance, but had a dissent vote against status quo and voted for 25 bps rate cut to ease the stress on demand.
“Certain high frequency economic indicators suggest loss of momentum, albeit not a material slowdown. A contrarian view is also compelling. RBI survey highlights higher consumer confidence, and higher rural demand amidst commodity price risks. However, at this juncture, the cost of policy errors will be huge and is best to err on the side of caution.”
According to Bhattacharya, there is a reason why the government and the RBI must continued to focus on inflation. For now, the inflation expectations are down, fuel inflation is sharply lower and food inflation should be controlled once the Kharif supplies hit the market. However, what is disconcerting is the global commodity inflation. There are now expectations of a massive Chinese stimulus and the direct impact of this stimulus will be felt on commodity demand and commodity prices. The impact is already visible on the LME.
As Bhattacharya underlined, the concerns are not so much about what has happened but what could happen. If Chinese demand picks up then a lot of commodity inflation is going to be imported into India. Hence, the RBI must not only be prepared with a Plan-B if inflation bounced, but also keep the necessary room to manoeuvre the rates either ways. That would not be possible if the RBI turns too dovish. Saugata Bhattacharya voted for a change in monetary stance to neutral and for a status quo on interest rates.
“The mainstay of aggregate demand; consumption and investment demand, are gaining momentum with private consumption and gross fixed capital formation (GFCF) growing at 7.5% in Q1. That is suggestive of growth resilience. Private consumption momentum looks sustainable on better agricultural outlook, rural demand, and buoyancy in services.”
According to Prof Ram Singh, the growth concerns may have been inflated. Even assuming the negative growth in core sector and IIP data, there are enough data points that hint at robust growth. Quite often the yoy numbers like core sector and IIP are very vulnerable to the base effect, and here that seems to be the problem. Yes, there is a slowdown due to weak consumer demand, but that is normally cyclical in nature. According to Prof Ram Singh, one can take solace from the fact that consumption and investment demand continue to be buoyant and the latest RBI survey has also hinted at higher capacity utilization on a seasonally adjusted level. These are positive signals. Prof Ram Singh voted for changing the stance of the policy to Neutral and for maintaining status quo on rates.
“RBI’s cautious and calibrated approach has paid off. Monetary policy is working well to contain inflation. Going ahead, there is greater confidence on inflation aligning with the target, except due to disruptions by weather or geopolitics. We need to keep a close watch on global commodity prices, especially food and metal prices, which have been hardening.”
According to Rajiv Ranjan, the good news is that the monetary policy action taken by the RBI MPC since May 2022 appears to have delivered the results. Inflation has come down sharply from peak levels in late 2022 and barring some cyclical food price shocks, the trend of inflation appears to be hovering around the 4.5% mark. Not only has the level of inflation come down, but even the inflation expectations are down, which helps to anchor the level of inflation. Normally, tapering inflation expectations is a barometer of confidence that the RBI can intervene and bring inflation under control. That is the confidence in customers that holds the key to the credibility of the central bank.
Rajiv Ranjan feels that when the cautious approach has paid off, there was no reason to make any drastic change. However, as Ranjan says, two risks to inflation still exist. Firstly, the geopolitical situation in West Asia is worsening. That not only makes oil more expensive, but also virtually blocks the key trade routes for India through the Red Sea. Also, Rajiv Ranjan has underlined that there is still no consensus on policy globally. Around 10 countries followed the example of the Fed and cut rates. However, 11 countries have opted to pause on rates. Most countries, this time around, are tweaking their policies to suit their unique needs and India should do the same. Rajiv Ranjan voted for status quo on rates and shift in stance of the monetary policy to Neutral.
“The persistence of inflationary pressures can dissipate with a less restrictive stance of monetary policy. This assessment gains credence with the success in squeezing out inflation persistence that has been achieved. It would be apposite to recalibrate policy stance that reflects openness to reduce degree of policy restraint if inflation evolves on expected lines.”
According to Patra, the economic activity has been relatively resilient despite the disinflation efforts of the RBI. Normally, economists associate a hard landing with such aggressive rate hikes, but there has been no such risk for India. Hence, it would safe to assume that growth is on its own momentum and there is not much of a growth spurt that the RBI can be expected to trigger through rate cuts. The best that the RBI can do is to ensure that the inflation stayed anchored close to the 4% mark so that real GDP growth is not impacted. In the first quarter of FY25, the nominal GDP growth was higher than the year-ago quarter, indicating at robust economic activity. However, real GDP growth took a hit on account of higher inflation in Q1. Patra believes that inflation pulling down real growth is a situation that is best avoided.
“At this stage of the economic cycle, having come so far, we cannot risk another bout of inflation. The best approach now would be to remain flexible and wait for more evidence of inflation aligning durably with the target. Monetary policy can support sustainable growth only by maintaining price stability.”
The gist of the governor’s statement was that; we must not overtly focus on high frequency indicators. They capture the momentum; not so much the secular story. For instance, the balance sheets of banks and corporates continue to remain healthy. Consumption and Investment, the two key drivers of growth have shown sustained growth in Q1 and also in Q2. The real GDP is likely to grow at 7.2% for FY25 and at 7.1% for FY26, which would be robust performance on a much higher base. The RBI governor also felt that it was the right time to shift the stance of the policy to neutral, but hold rates for the time being. After all, monetary policy can best support real GDP growth by keeping inflation in check. Boosting nominal growth was more of a fiscal task, outside the purview of the RBI.
IS THE US RETHINKING DOVISHNESS TOO?
In the last couple of months, the CME Fedwatch had turned aggressively dovish. At one point the CME Fedwatch was expecting the US Federal Reserve to cut rate by up to 125 bps by end of 2024 and by 250 bps by the end of 2025. That was always going to be a tough call, as hawks like Michelle Bowman had pointed out in the past. Now, even the CME Fedwatch has toned down its expectations to 75-100 bps of rate cut overall by end of 2024 and 175 to 200 bps of rate cuts by end of 2025. Clearly, even the Fed is unlikely to live up to the aggressive promises it started off with. RBI is right that with robust growth, they have the luxury of biding their time. That is exactly what the RBI is likely to do till more unambiguous data flows in!
Related Tags
IIFL Customer Care Number
(Gold/NCD/NBFC/Insurance/NPS)
1860-267-3000 / 7039-050-000
IIFL Capital Services Support WhatsApp Number
+91 9892691696
Download The App Now
Follow us on
2025, IIFL Capital Services Ltd. All Rights Reserved
IIFL Capital Services Limited - Stock Broker SEBI Regn. No: INZ000164132, PMS SEBI Regn. No: INP000002213,IA SEBI Regn. No: INA000000623, SEBI RA Regn. No: INH000000248
ARN NO : 47791 (AMFI Registered Mutual Fund Distributor)
This Certificate Demonstrates That IIFL As An Organization Has Defined And Put In Place Best-Practice Information Security Processes.
