RBI Monetary Policy Preview: Another Pause Expected Amid Inflation Relief

India's Monetary Policy Committee is likely to maintain its status quo on the Reserve Bank of India's key lending rate even as inflation eases and economic activity stays resilient.

Of the 38 economists polled by Bloomberg, all except one expect the MPC to hold the rates on the Reserve Bank of India's repo rate on Friday. The benchmark policy repo rate currently stands at 6.5%.

With strong growth momentum, core inflation declining, and the global backdrop turning more benign, the RBI's policy optionality is widening, Rahul Bajoria, chief economist at Barclays, said in a note. "Still, we expect the bank to stay cautious, taking macro prudential steps to curb lending, while keeping an eye on supply shocks and potential second-order inflationary effects."

GDP Growth

India's economy grew better than expected in the second quarter of FY24, driven by manufacturing and the government's spending push ahead of elections. GDP grew 7.6% in the July–September quarter, lower than 7.8% in April–June, but significantly higher than economist estimates at 6.8% according to Bloomberg.

Gross value added, which strips out indirect tax and subsidies, is estimated to have grown 7.4% as compared with 7.8% in the previous quarter.

The better-than-expected expansion was driven by manufacturing, which grew 13.9% as compared with a 4.7% rise in the prior quarter.

“With the GDP data for Q2 FY2024 appreciably higher than the MPC's last forecast, and continuing concerns on various aspects of food inflation, we expect the MPC to pause in its December 2023 review, amidst a fairly hawkish tone of the policy document,” stated a research note by ICRA.

CPI Inflation

India's retail inflation eased in October, though food inflation headwinds remain. CPI inflation stood at 4.87% in October compared with 5.02% in September. However, food and beverage inflation was steady at 6.24% in October compared with 6.3% in September.

October marked the second straight month of retail inflation staying within the central bank's target of 4(+/-2)%.

While the RBI may raise its annual growth forecast modestly, it is likely to keep its inflation forecasts unchanged, citing uncertainty around the near term outlook due to possible changes in domestic food and international energy prices, Bajoria said.

Banking Liquidity

Instead of the rate-setting channel, the RBI's focus now appears to be on using liquidity management tools and macroprudential measures to facilitate the transmission of earlier rate hikes.

Liquidity tightness is likely to continue due to currency in circulation leakage, forex intervention, advance tax outflows and open market operation sales, as and when required, said a research note by Kaushik Das, chief economist at Deutsche Bank.