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RBI policy to be announced today: 6 important things to watch out for in MPC meeting outcome


“The MPC may keep the repo rate unchanged at 6.5% this week, but may soften its monetary stance to ‘neutral’ from ‘accommodation withdrawal’. This would be consistent with some weakening seen in domestic economic momentum and rapid fiscal adjustment. “However, we do not expect any discussion/guidance on the path and timing of rate cuts just yet. In our opinion, rate cuts are still far away. After all, the headline CPI is still elevated and the RBI seems committed to controlling the CPI to 4″. That said, RBI’s actions/guidance on the liquidity front will be closely watched,” the brokerage house said Nuvama in a recent note.

The key reasons behind this forecast, according to Nuvama, are: i) The core CPI is now at a comfortable level of less than 4%. ii) Domestic private consumption and exports are weak, which is also reflected in moderate growth in business income. iii) Fiscal policy will be adjusted rapidly in FY25 as per the Union Budget.

He expects the RBI to signal the end of tightening (as does the US Federal Reserve) by softening its stance, although he doesn’t think the MPC will be in a rush to recommend lower rates yet. After all, India’s headline CPI remains elevated, led by food, and the Fed remains on hold. The RBI’s comments on liquidity will be closely watched, the brokerage added.

While RBI policy is also expected to remain a non-event like the interim budget, let’s take a look at five trends that will be closely monitored:

Economic growth: According to Ajit Kabi, research analyst at LKP Securities, the economy is likely to grow by 7.3% driven by strong investment growth (expected to grow by 10.3%). Industrial growth may expand 7.9% in FY24, up from 4.4% in the previous year. However, there is concern about the significantly slower growth in consumer demand, which contributes 50% of GDP. The agricultural sector is also facing headwinds due to below-average rainfall. Overall, real GDP numbers are likely to remain strong. Against the backdrop of improving economic prospects, the RBI is likely to raise the FY24 growth projection to 7.3%, Kabi noted.

InflationKabi further stated that headline inflation was on the higher side of 5.7% in December, driven by rising food prices (especially pulses, pulses and spices). However, core inflation remains stable below 4%.

“Higher inflation has been a source of some discomfort for policymakers, with the RBI governor emphasizing that the headline CPI needs to be reversed towards the 4% target. Poor sowing of crops during winter has been a reason However, the core CPI has been declining consistently, falling below 4% in December, a post-COVID low, clearly suggesting that the second-round effects of high food inflation have been attenuated. This should be quite reassuring to policymakers,” Nuvama noted in his report.

Liquidity management: In the upcoming MPC meeting, the RBI is expected to maintain its emphasis on liquidity management, given the tight money market conditions where the call rate is above the repo rate.

“In its next meeting, the RBI is expected to maintain its emphasis on liquidity management, given the persistently tight money market conditions where call rates continue to hover above the repo rate. Despite some moderation observed last week, liquidity in the banking sector The system has remained in deficit since the last policy meeting, peaking at more than $3.5 billion in the last week of January. “Consequently, the systemic liquidity shortfall has tightened overall money market conditions, leading to an inversion in a segment of the yield curve,” CareEdge said in a note. An increase in government spending in the The coming days will alleviate the systemic liquidity shortfall to some extent, although the overall liquidity situation is expected to remain tight, he added.

domestic demand: According to Nuvama, rural demand has not recovered and some high-frequency indicators, such as CV sales, electricity generation, fuel consumption, public spending and company income growth, have moved to a slow lane. Furthermore, the latest Union Budget points towards strong fiscal consolidation in the coming year, with the Centre’s total expenditure growing at just 6%, well below the NGDP growth. In this domestic context, the global monetary context is one in which most major central banks have indicated an end to the tightening cycle, although the pace and timing of rate cuts remains quite uncertain.

Fiscal balance: By reducing the fiscal deficit target, the government indicated that populist spending or incentives can be avoided in preparation for the upcoming general elections, Kabi further noted.

External situation: CareEdge, in a recent report, noted that the external environment remains favorable, with trade deficits shrinking and foreign exchange reserves strong. In December, the goods deficit hit a five-month low of $19.8 billion. Projections for the overall current account deficit for FY24 indicate a modest figure of 1.2% of GDP. Cumulative foreign portfolio investment (FPI) inflows for calendar year 2023 amount to $28.7 billion. Forecast factors such as India’s inclusion in JP Morgan’s bond index, possible inclusion in Bloomberg’s emerging market local currency indices and strong performance of the domestic economy are expected to sustain FPI flows in the future. future, he added.

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In conclusion, the economic outlook remains healthy. As core inflation and wholesale inflation remain stable, headline inflation is likely to stabilize in the coming periods with the arrival of Rabi crops.

“Given the tightening liquidity situation, the RBI is likely to support economic growth with a cautious stance on inflation. Accordingly, we expect an unchanged policy rate and the possibility of a change in stance to NEUTRAL. Furthermore , RBI may take steps to improve liquidity conditions “We expect a policy rate cut by June 2024,” Kabi said.

Disclaimer: The opinions and recommendations above are those of individual analysts or brokerage firms, and not those of Mint. We advise investors to consult certified experts before making any investment decisions.

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Posted: Feb 8, 2024, 06:05 am IST



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