RBI February 2024 policy preview: Status quo likely for sixth consecutive time; will the MPC change its stance?

RBI Monetary Policy Committee Meet 2024: After staying put on the key policy rate for the last five consecutive rate-setting meetings, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to maintain a status quo for the sixth time tomorrow, which will also be the last policy of fiscal 2023–24. The MPC, in its previous monetary policy, retained the repo rate at 6.5 per cent

The repo rate is the rate at which the RBI lends funds to commercial banks in case of a deficit.

All of the economists polled by Zee Business expect no rate cut in this policy. Further, there is a unanimous view that the RBI will not resort to rate cuts before the Fed rate cut.

Domestic brokerage Emkay Global, in its policy preview report, said that it sees the Fed not cutting the rate before June 2024 and expects the RBI to follow suit with a lag. "We maintain that the RBI will not precede the Fed in any policy reversal in CY24," the report added.

Of the total economists polled by Zee Business research team, 30 per cent expect the RBI to initiate the rate cut as early as in the June policy decision, while 70 per cent expect a rate cut in the August policy outcome.

Ajit Kabi, a research analyst at LKP Securities, also forecasts a policy rate cut by June 2024. Nevertheless, there is a divided view on the likely stance that the RBI will opt for in the upcoming policy announcement. Kabi believes the apex bank may see a shift in stance to “neutral’ from “withdrawal of accommodation”.

“Given the tightening liquidity condition, the RBI is likely to support economic growth with a cautious stance on inflation. Consequently, we expect the unchanged policy rate and the possibility of a shift in stance to NEUTRAL,” added Kabi.

In contrast, Emkay stated that the stance change that has been linked to liquidity behaviour can wait until April, as it will give the RBI some elbow room to understand and adjust to global dynamics.

While the January 2024 deficit has averaged at Rs 2.1 lakh crore, the brokerage estimates the system liquidity deficit will likely ease to 0.5-0.7 per cent of net demand and time liabilities (NDTL) in the coming months versus 1.1-1.2 per cent of NDTL in January 2024, helped by the government’s cash drawdown, apart from other factors.

Holding a similar view, Suman Chowdhury, Chief Economist and Head of Research, at Acuité Ratings & Research, anticipates the status quo at least until June 2024. Thereafter, a rate cut totalling 50–75 bps in the next six months is anticipated by the expert. The policy stance may, however, be changed to neutral by April 24, given the low likelihood of a further rise in interest rates, Chowdhury added.

GDP may be revised upwards for FY24

In the previous monetary policy, the RBI governor projected real GDP at 7 per cent for FY24. Nonetheless, there is a view that, in the backdrop of an improved economic outlook, the RBI may revise its growth projection for FY24 upwards to 7.3 per cent.

“Growth may not be a worry for the central bank for the next 2-3 quarters given the resilience in the Indian economy,” added Chowdhury.

Headline Inflation a concern; core inflation stable

Food inflation, as per economists, will remain a key risk factor for headline inflation in India. With the continuing impact of El Nino on the agriculture sector, there is an upside risk to food inflation, which can keep the overall CPI inflation near 6 per cent over the next six months.

"However, we expect the government to take timely and proactive steps to prevent any further and sharp rise in food prices, particularly before the elections. Therefore, we don’t expect headline inflation to go beyond 6 per cent in the next two quarters,” Chowdhury commented on his outlook on inflation.

Core inflation has come down to a comfort zone below 4 per cent, and "we believe that it is likely to be stable in the near term despite some pressures on food inflation. The overall private consumption demand remains relatively weak, at 4.4 per cent estimated for FY24," the expert added.

In its December monetary policy, the RBI projected CPI inflation for FY24 at 5.4 per cent.