RBI MPC – Verbals aside, expect monetary easing soon

9 Feb 2024 , 11:08 AM

The RBI’s MPC continued with its status-quo on rates and stance, as expected (Prof. Verma voting for a change in stance as well as a rate cut). Analysts of IIFL Securities feel that RBI’s FY25 GDP growth forecast at 7% is too optimistic, while inflation forecast at 4.5% is broadly in line. While current growth momentum in India is very strong, it faces headwinds from slowing global growth, govt’s fiscal consolidation and trimmed capex growth, weak HH consumption and pvt. sector capex. On concerns about high levels of system liquidity deficit, RBI dismissed the same stating that it is being driven by a number of exogenous factors (high govt. cash balance in this case) and govt. spending had since picked up augmenting system liquidity. Analysts of IIFL Securities expect: FY25 GDP growth at 6%+, CPI inflation at 4.2% and monetary easing to start from Jun’24 policy. 

Status quo on rates & stance: 

RBI MPC continued its pause on repo rate at 6.5% (5:1 majority), in line with expectations. Accordingly, SDF stands unchanged at 6.25% and MSF rate at 6.75%. The central bank maintained its current stance of withdrawal of accommodation (5:1 majority) citing incomplete transmission to lending rates (against 250bps hike in repo, WALR on fresh loans rose by 181bps only while WADTDR on fresh deposits rose by 246bps) and headline inflation ruling above 4% target. While Prof. Jayanth Verma has been in disagreement over MPC’s stance since past several meetings, he has for the first time voted for a rate cut of 25bps in this meeting. 

RBI’s FY25 GDP growth forecast at 7% too optimistic, inflation forecast at 4.5% broadly in line: 

RBI introduced its FY25 GDP growth and inflation forecast at 7% & 4.5% respectively. While inflation forecast seems to be broadly in line, its GDP growth forecast looks too optimistic. International macro looks weak with major economies either slowing (US, China) or already contracting (UK, EU, Japan). Lag impacts of monetary tightening done till now are yet to be felt as policy as well as real rates are substantially restrictive. Further, any monetary easing which is likely in CY24 will also have its own lag. India’s current growth momentum is strong, but can face headwinds from slowing global growth. Further, Central govt.’s has trimmed its capex growth in FY25 Budget (17% on FY24RE vs around 30% in previous 4 years), and budgeted a steep consolidation in fiscal deficit from 5.9% to 5.1% of GDP, providing further headwind to growth. HH consumption and private sector capex show no signs of a generalised pick-up. Analysts of IIFL Securities feel that private capex acceleration remain elusive, as they think the gap between NGDP growth (at 10.5% for FY25) and borrowing cost (currently 5yr AAA/ AA/ A yields at 7.7/8.4/10% respectively) is not sufficient to trigger investment acceleration, but fall in yields during the year will make it more probable that this trigger eventuates. 

RBI merely a passive onlooker to intermittent distortions in system liquidity: 

Governor hinted that the recent high system deficit (~INR3.5trn on Jan’24) was as a consequence of high govt. cash balances. He stated that adjusted for govt. cash balances, potential liquidity still in surplus and that govt. spending had since picked up augmenting system liquidity (system deficit has come down to ~INR1.5trn currently). He also mentioned that liquidity is being driven by a number of exogenous factors and analysts of IIFL Securities concur. They feel that recent liquidity situation was not by design to curb exuberance on unsecured lending which analysts of IIFL Securities feel is better addressed by increasing risk weights and system liquidity has been in deficit since Sep’23 with call rates at 6.75% ever since. With expectations of easing inflation and consequently policy rates, system liquidity should also ease. 

Continue to expect lower yields and softer INR: 

Analysts of IIFL Securities outlook on interest rates & yields continue to be benign. Flows from sovereign bond inclusion of $25bn+, limited supply of govt. securities due to fiscal consolidation amidst increased demand, expected monetary easing and export of Chinese dis-inflation globally makes a solid case for lower yields and softer INR. Analysts of IIFL Securities feel RBI might intervene heavily, else face a risk of currency appreciation as well as substantial loosening in monetary conditions due to substantial fall in rates.