RBI likely to keep REPO rate unchanged in ensuing policy review: Economists, bankers at ASSOCHAM-EGROW meet
New Delhi: RBI is expected to keep the policy interest rate unchanged in the ensuing meeting of Monetary Policy Committee in the wake of global and domestic factors including inflationary concerns, a majority view emerged amongst top economists and bankers at a brainstorming session jointly organised by ASSOCHAM and EGROW Foundation. ASSOCHAM and EGROW Foundation organised a Shadow Monetary Policy Meeting ahead of the meeting of the RBI Monetary Policy Committee on October 6, 2023.
”The consensus view of economists, bankers and experts in the field of global financial markets is that given the backdrop of slowing growth and rising inflation in global markets, India has managed to strike a good balance between growth and measures to tame inflation,” ASSOCHAM Secretary General Mr Deepak Sood said, complementing an eminent panel for their insight about the state of global economy, particularly in the context of emerging economies.
The intense discussions touched upon not only the likely outcome of the RBI-MPC meeting but also several macro-economic issues. Dr. Surijit Bhalla, Former Executive Director-India of the International Monetary Fund, stated, “Maintaining the current monetary policy stance is crucial, with consensus among experts. Rate cut uncertainty depends on various economic factors.”
He raised concern about the U.S. economy, saying, “U.S. economic patterns are unusual due to high bond yields from Japanese and Chinese disinvestment.” “Seasonally adjusted rates benefit the U.S., with month-on-month inflation at 0.2%-0.3%, that is annualizing to around 3%.” He emphasised, “This low inflation implies a historically unusual real interest rate of about 2.5%.” He is expecting an economic slowdown but dismisses an imminent recession in the U.S.
Mr Rajkiran Rai G, Chairman, ASSOCHAM National Council for Banking and MD, National Bank for Financing Infrastructure and Development said RBI is likely to maintain the policy rate amidst high retail inflation Explaining his views on the economy he said “India’s remains the world’s fastest-growing economy. Economic indicators for the first half of 2023 signal expansion driven by domestic demand, government capital expenditure, and improved capacity utilisation. However, concerns of a potential growth slowdown in upcoming quarters due to election-related capex moderation, along with urban and rural demand disparities, monsoon uncertainty, export slowdown, and global financial conditions persist. We anticipate a gradual, sector-specific recovery, despite challenges. Key export sectors like petroleum, gems, jewellery, handicrafts, textiles, garments, and chemicals have experienced a decline in growth. Initiatives such as the PLI scheme and trade deals aim to boost exports.
Mr Madhav Nair, Co-Chairman of ASSOCHAM National Council for Banking and CEO-India, Bank of Bahrain and Kuwait (BBK) believes in the status quo. He emphasised, “I am also of the view that the rate should be held stable. I don’t think the time is right for a rate cut right now because inflation still seems to be hovering around 5.5 to 6%. Monsoon has been deficient in some states, so we’ll have to see how that impacts.”
However, Dr. Charan Singh, Advisor, National Council for Banking and Chief Executive EGROW Foundation, suggested that the Reserve Bank of India should consider a rate cut, taking into account the country’s growth trajectory, investment patterns, and performance in agriculture and manufacturing. Commenting on the global monetary policies, he said, “Most central banks, except the European Central Bank (ECB) and Brazil, have paused their rate hikes, further oil price increases are likely and that will create uncertainty in the global economy. While the U.S. Federal Reserve’s actions remain uncertain, India should start thinking about rate cuts.”
Mr Indranil Sen Gupta, Head of Research at CLSA, India, expects the Rupee to reverse the declining trend, “We think the dollar can reach 118 to a Euro by March, as the Fed is expected to have completed its actions. Whether the Fed stops at 5.5% or goes to 5.75%, it’s likely to conclude by March. After that, markets will anticipate rate cuts, and they should start pricing that in, early. Additionally, the trade seasonality will favour the rupee towards the end of the year, and we have some significant payments,
Ms. Upasana Bhardwaj, Chief Economist at Kotak Mahindra Bank, favoured the status quo in the REPO rates, “To ensure financial stability amid domestic and global risks, maintaining the current monetary policy status quo is recommended.” Elaborating her views on the current economic situation, she stated, “Domestic growth is stable, with some pockets of weakness in consumer demand. Globally, rising energy and food prices create uncertainty, affecting inflation trends. The US Federal Reserve’s cautious approach impacts interest rates worldwide, posing concerns for emerging economies like India.”
She is optimistic about the improvement in India’s inflation trajectory but underlined risks due to deficiency and unequal distribution of monsoon and volatile food and energy prices. Core inflation remains manageable, suggesting a need for a steady monetary policy. She also added, “The RBI’s strategy of maintaining tight liquidity aligns with global risks, including potential capital outflows. India’s inclusion in the global bond index offers long-term benefits, but short-term challenges may delay gains.”
Mr Siddhartha Sanyal, Chief Economist & Head of Research at Bandhan Bank, supported keeping the interest rate unchanged although he expects the price pressures to cool down. He stated, “In the last two months, while CPI inflation numbers shot up due to rising food prices, we are now seeing some moderation in these food prices. Going forward, we expect domestic CPI inflation to be around 5%, and the average CPI inflation for the year to be close to 6.5%, possibly slightly lower. This aligns with the RBI’s earlier forecasts for Q3 and Q4 of the financial year.”
Mr Arjun G Nagarajan, Chief Economist & Communication Manager at Sundaram Asset Management Company, said, “We expect the RBI to maintain a hawkish pause all through FY 24, and anticipate the start of rate cuts by the end of the June quarter in 2024. We foresee a shallow cycle, possibly limited to a reduction of 50 to 75 basis points. This aligns with the Federal Reserve’s recent projection of 50 basis points rate cuts for 2024.”
“The two key factors driving the RBI’s decisions are alignment with the Federal Reserve’s monetary policy and the trade deficit, which has not yet reached sustainable levels.”