MPC Preview: Expectations Of Yet Another Status Quo

India’s Monetary Policy Committee will meet for the first time this financial year from April 3 to 5. Still, not much has changed since the committee's last meeting in February, with inflation continuing to show signs of easing while economic growth remains robust. 

As such, all economists polled by Bloomberg expect the MPC to maintain status quo for the seventh straight meeting. The benchmark lending rate is 6.5%.

"With no urgency to act, we see rates and the stance remaining on hold in April," said Rahul Bajoria, chief economist at Barclays.

Liquidity conditions have eased in the past few weeks, with ongoing balance of payment surpluses and pre-election spending likely to keep liquidity conditions in check, said Bajoria.

India's retail inflation in February remained mostly unchanged from a month ago. The Consumer Price Index-based inflation stood at 5.09% in February, as compared with 5.1% in January.

While food price inflation increased to 8.7% in February, core inflation—excluding food and fuel—eased to 3.4%. This is the lowest since, at least, 2018.

GDP grew 8.4% over a year earlier in the October-December quarter, according to the latest official estimates released in February, after the last monetary policy. Gross value added, which strips out indirect tax and subsidies, is estimated to have grown 6.5%. With growth in the first three quarters of FY24 standing north of 8%, the official forecast might be raised, along with a small upside bias for FY25 GDP numbers, said Radhika Rao, economist at DBS Bank.

Lower-than-expected gross borrowings by the government, in the first half of FY25, is expected to support bonds across the curve in the near-term, followed by lower inflation prints.

"Near term, we see bull-steepening bias to reinstate, helped by lower shorter-tenor borrowings, better system liquidity and higher FPI positioning in sub-seven year tenors," said Madhavi Arora, lead economist at Emkay.

While India bonds have witnessed structurally improved demand-supply dynamics, evolution of policy pivots remains to be seen, she said.

The Indian rupee recently touched record lows, led by external cues and the absence of strong intervention by the central bank. With Fed rate cuts expected to begin from June, dollar strength is likely to wane, which would be a tailwind for INR, said a research note by Bank of Baroda.

This, along with robust foreign inflows and comfortable trade deficits will ensure that INR trades with an appreciating bias in FY25, according to Aditi Gupta, economist at Bank of Baroda.

She expects the INR to trade in a range of 82.50-83.50 per dollar. At a record $642.6 billion, RBI’s foreign exchange reserves are more than enough to cushion the rupee against any volatility, she said.