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Thirty-First EGROW Shadow Monetary Policy Committee Meet on December 4, 2023


Recording of the event

Key Takeaways

  1. Is the CPI properly estimated in our country or is it outdated?
  2. Are the growth estimates properly prepared and why the huge divergence between projected and actuals?
  3. The economy has performed extremely well in quarter 2 in terms of growth and inflation.
  4. The performance of manufacturing is promising as well as the tax collection, exports and employment in recent months.
  5. Is it the correct time to start reducing the interest rates? There is a mixed reaction –
    1. India should follow the US rates cycle
    2. As strong Indian Economy is emerging decoupling can be considered
    3. Wait for Inflation trend to firm up.

Recommendations of EGROW Shadow MPC

Members of EGROW 6

Repo Rate
Extended Pause – 4
Pause with preparedness to lower – 1
Decrease – 1

Guests 4

Repo Rate
Extended Pause – 4
Pause with preparedness to lower – 0
Decrease – 0

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Surjit Bhalla, Former Executive Director, International Monetary Fund

RBI should continue with the pause. However, there are important issues that need to be deliberated upon - Is the CPI weighting diagram outdated? Why is there a significant divergence in estimates and projections? Fiscally, how are states performing? What are the default rates on personal loans? On employment, should alternate data sources be explored to form robust estimates?

2. Dr. Charan Singh, CEO and Director, EGROW Foundation

The economy is performing well with the GDP figures for 2nd quarter exhibiting a strong trend. The strong economic performance is supported by agriculture, manufacturing and construction activity. The performance of the core sector industries, especially cement, coal, electricity, steel and natural gas are recording large growth. The export sector, despite global slowdown is also performing well. The labor force participation rate is high and unemployment has declined to 6,6 percent as per latest estimates. The central government is supporting domestic demand by continuing the food subsidy program for the next 5 years. The economic growth is ably supported by credit growth through the banking sector. The fiscal performance in terms of collection of direct taxes and GST is also high. The inflationary pressure has waned away with WPI continuing in the negative zone, CPI less than 5 percent and food CPI in the range of 6 to 7 percent.

Globally, inflationary pressures are easing and most central banks are holding on to the policy rates though two have started to reduce.

It is time to start considering reducing the Repo rate in India. The fear of capital outflow may be unfounded as by now that would have been factored already by the market. But with the latest growth trend in the first half of the year, much higher than the projections made by the RBI, decoupling from the US rate cycle should be considered. Further, there is an aspect of political economy that needs to be considered too - the US would soon enter into their own electoral cycle, politically, and then decoupling could get delayed. The US rate cycle could get delayed for US centric-specific reasons and India could do well to step away from that sooner than later. Also, general elections are just about 6 months away in India and the two budgets in the next year could be interim. Hence, India would need an India-centric monetary policy and not that inter-related to the US. Thus, given the positive trend in growth to continue in the busy season as well as prices in a range-bound band, the RBI could provide a positive impulse to the economy.

3. Shri Indraneel Sen Gupta, Head of India Research, CLSA

We are calling for a 25bp RBI rate cut as:

  1. Inflation in India has subsided into RBI's 2-6 percent mandate. Core inflation is below 4 percent.
  2. Real RBI repo rate has climbed to 1.6 percent on head line and 2.7 percent on core which is far higher than 1 percent target.
  3. The Fed is also beginning to run a high real rate that may not be sustainable for long.

Will RBI rate cuts not impact INR? RBI rate cuts typically support growth in India. FPI equity investments tend to be 15-20 times of FPI debt investments. As they chase growth, they drive INR up or down as rates go down or up.

4. Ms. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

We expect the MPC stay on pause for the upcoming policy with respect to rates as well as stance. With uncertainties over food inflation posing upside risks to headline along with a robust GDP data we expect the MPC to remain cautious in their guidance. While inflation estimates should remain unchanged by the RBI, the GDP estimates will need an upward revision.

Going ahead, with inflation not expected to durably trend towards 4 medium term target we expect RBI to keep its neutral to hawkish bias intact and mai and a prolonged pause at least through mid FY2024

5. Shri Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank

  1. Headline inflation likely to move up over 5 per cent and remain there until fiscal year end.
  2. Cereals and pulses inflation elevated and sticky and could pose risks to inflation and inflation expectations
  3. Incomplete transmission of policy rates to lending rates with possibility of " overlending" breeding inflation and stability risk
  4. Uncertain global environment warrants vigilance of capital flows

Recommend status quo on policy rates, unchanged stance and vigilance on system liquidity

6. Shri Siddhartha Sanyal, Chief Economist & Head- Research, Bandhan Bank

RBI should continue with the policy rate and the stance. There has been a upside surprise in the GDP but RBI should not be in haste to reduce the rates. In general, there is immense uncertainty in the market and the RBI should continue with a cautious approach.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

1. Shri Subhas C. Aggarwal, Chairman and Managing Director, SMC Group.

In the upcoming Monetary Policy Committee meeting scheduled from December 6th to December 28th, my expectation is that the Reserve Bank of India (RBI) will opt to maintain the existing interest rate at 6.5 percent, marking the 5th consecutive instance without any alterations. Despite a robust 7.7 percent GDP growth in the first half of the year, I believe there's room for a revised estimate in the GDP growth for the fiscal year 2023-24, suggesting a range of 6.5–6.8 percent. My reasoning is based on the notion that even if the growth rate moderates in the next six months, a respectable figure can still be achieved. Additionally, I note a decrease in CPI inflation to 4.9 percent in October, below the RBI's fixed rate of 5.4 percent, indicating that the MPC may not revise this figure. I also highlight the RBI's focus on liquidity and inflation, projecting a continued emphasis on maintaining the current interest rate and liquidity measures until at least June 30, 2024.

2. Shri Arjun G. Nagarajan, Chief Economist, Sundaram Mutual

On monetary policy, we continue to stress on two points:

  1. RBI rate cycle is directly related to the Fed's rates and most importantly comfort around the trade deficit that remains elevated. We expect the RBIs rate cuts to start with a lag, only after the Fed due to its elevated trade deficit.
  2. It is important to reiterate here that the RBI's rate cut cycle is to be very shallow, only around 50 to 75bps, spread through FY25 with front loading.
  3. On inflation, we see some near-term pressure but given proactive government action it should broadly be manageable.
  4. On growth we prefer looking at the numbers on a 4yr CAGR basis. On this metric, the numbers tell us that we are exactly where we were in Mar 2023 on momentum and all the more reason for the RBI to stay its ground on rates all the way till June2024.

Regarding bond yields, with the current governments contained borrowing the factors in order of importance are crude prices, domestic liquidity, inflation and the rupee. While there is uncertainty around crude in the near term, we feel the US and India yield spread should start widening close to its long-term averages as the US starts its rate cuts from June FY24.

The CPI-WPI gap is expected to start narrowing next year as the favourable base effect wears away and the recent firming up of commodity price momentum catches up.

3. Shri Madhav Nair, Co–Chairman ASSOCHAM, National Council for Banking and CEO-India, Bank of Bahrain and Kuwait

Better than expected second quarter GDP growth of 7.6% may result in FY24 growth estimates to be revised upwards. This was on back of the growth in Manufacturing sector which grew at 13.9%. India Inc across sectors also had a robust growth both in terms of topline as well as PAT.

Weaker monsoon has led to lower than normal kharif crops output this year. The delayed harvesting of kharif in turn also affected the rabi crop sowing, though the gap as compared to a year ago has significantly narrowed down by end November.

Consumer price-based inflation (CPI) eased to 4.87 per cent in October from 5.02 per cent in September. The retail inflation, however, remains above the 4 per cent target of RBI. There is a strong possibility that inflation in the short term may start marginally increasing due to rise in food inflation.

In my view the repo rate and stance should remain unchanged for the time being but there is a case for MPC to start thinking about reducing rates early next year as the core inflation eases and the chances of food price shocks are minimized.

4. Shri Rajan Pental, Co-Chairman, ASSOCHAM, National Council for Banking and Executive Director, YES Bank Ltd

  1. Headline CPI Inflation has cooled off significantly from its peak levels of 7.44% when tomato prices had surged. The last reading for inflation for October 2023 was at 4.87%. On a yoy basis, vegetable prices in October were at 2.7% compared to 37.4% in July 2023.

  2. Further, the RBI should take comfort from the fact that core CPI inflation had consistently come down through the financial year till date – from 5.30% in April 2023 it has cooled off to 4.25% in October 2023.

  3. However, one cannot be totally confident of the food side price movements in the wake of climate changes that we have seen recently. The El-Nino conditions have intensified, FAO food price index has come down from its peak but is still significantly higher than the pre-COVID levels. In this context, it is likely that the country needs to be ready for more price shocks and the monetary policy will be tasked with addressing the supply side shocks to prevent inflation getting entrenched into the system.

    1. For November, the National Horticulture Board (NHB) data indicates a 2.3% increase in cereals prices (1.2%) last month while pulses prices have risen by 1.7% after a 3.0% rise in the previous month.

    2. There are some fears that the recent rains in Maharashtra could have caused some damage to the Onion crops.

    3. Further, data from department of Agriculture shows that areas sown under rabi wheat, rice and pulses is on the lower side compared to last year. Though it is too early to comment on the same and sowing can pick up, a point to remember would be relatively weaker reservoir levels in India. Rabi crops are pre-dominantly irrigation fed, and a weak reservoir level could be fuelling some worries over the Rabi output.

  1. YES Bank projects inflation at 5.5 percent average for FY24, going down to 5.1 percent average in FY25. On a comparative basis, RBI expects inflation to average at 5.2 percent in FY24 and reducing to an average of 4.5 percent in FY25. The stand that the RBI has taken over the last two policies is that during the period of COVID, they were happy with inflation being within the 4 (+/-2) percent band. Now inflation is below the 6 percent upper band, but the communication of the RBI has changed towards attaining the 4 percent target.

  2. After an upward surprise in GDP growth in Q1FY24 at 7.8%, markets were again surprised with another robust GDP growth for Q2FY24 at 7.6 percent. Industry sector has shown a more robust performance compared to the services sector; especially commendable being the manufacturing sector and the construction sector growth.

  3. We expect growth to slow in H2FY24 compared to H1FY24. Importantly, private investment demand continues to lag while growth is being pushed by government capital expenditure. Within the consumption spectrum, advance indicators point towards robustness in urban consumption vis-à-vis rural consumption. Given an average growth of 7.7 percent in H2FY24, we see the full year average GDP growth to be at 6.6 percent in FY24. For FY25, we currently have a forecast of 6.4 percent for GDP, but see some downside risks to this in the event that global growth slows very sharply.

    1. We do expect that growth will slow in Q3 and Q4 of FY24 as lagged implication of previous monetary policy tightening continues to percolate through. Further, the recent decision of the RBI to increase risk weights on consumer loans and loans from the banking sector towards the NBFCs is likely to lead to a slowing down of the personal loan growth – something that had probably been fueling domestic consumption story.

    2. Gross Fixed Capital Formation is primarily being led by government capital expenditure and can slow in the Q4FY24 owning to the election period setting in.

Given the growth-inflation dynamics that we project, the RBI will be forced to maintain a restrictive monetary policy for a longer period. With RBI’s Q1FY25 Headline CPI expectation of 5.2% and the current repo rate of 6.5%, the real interest gap is positive at around 130 bps. This is still lower than positive gap that existed in the pre-Covid period.


  1. RBI would remain in pause mode so far as rates are concerned. There is also unlikely to be any change in stance, and RBI will maintain its “withdrawal of accommodation” with a relatively hawkish commentary. As long as growth holds-up, monetary policy focus will remain on keeping inflation pressures contained.

  2. Should the RBI tighten given that both in Q1 and Q2 of FY24 growth has surprised on the higher side? We do not think there is any need for the RBI to tighten the nominal repo rate further. Rather, it should wait for inflation to moderate so that the real repo rate moves more on the positive side. The comfort for the RBI has been on the core inflation, while the big nervousness on the food inflation is behind us. Household inflation expectations have softened and should also, therefore, support the pause from the RBI.

  3. Will the RBI be able to cut its policy rate soon? The next move from the RBI is surely a reduction. But that seems to be quite a distance away. As explained earlier, the 4% inflation target eludes, and it is important for the RBI to keep reminding the market of this target from a credibility perspective.

    1. We think that the RBI might only be able to cut in Q2-FY25

    2. However, whenever the RBI is ready to cut rates, the rate cutting cycle is likely to be shallow, probably to the extent of 50-75 bps only from the current Repo levels of 6.50%.

    3. Developments on the global interest front will also be of relevance to the RBI and in this cycle, the RBI might not be able to move before the global interest rates move. Most of the Fed talk has pointed towards an end to the hiking cycle in the US, but also points to a long hold of the policy rates in the restrictive zone. Currently markets are pricing in a May 2024 as a start to the US rate cutting cycle, but this remains a huge uncertainty for the global financial markets.

    4. No action on the liquidity side, but a continued communication that liquidity is likely to be kept restrictive. The policy should also come clear on the RBI’s thoughts on OMO – the OMO announcement had led to a sell-off in the G-sec markets when it was indicated in the previous policy. Some indication on the anticipated system liquidity and the factors that might impact it is therefore desired.

    5. The RBI could also provide some clarification with respect to the thought process behind the recent actions taken to increase the risk weights of certain asset classes on the retail lending side.


1. Shri Raman Agarwal, Co-Chairman, FIDC.

  1. Increase in Risk Weight on All Bank Funding to NBFCs – Need to Exempt Funds used to On-lend to Categories Excluded from the Purview of the RBI Circular dt. 16th November, 2023

    In addition to increasing risk weights on consumer credit for banks and NBFCs, RBI has increased Risk Weights on All bank funding to NBFCs by 25% over and above the existing risk weights. Thus, NBFCs have been hit both on the lending as well as borrowing side. In addition to the increase in risk weight on bank borrowings being too steep, it also covers bank funds used by NBFCs to on-lend to those categories of loans which are excluded from the purview of the RBI circular dtd. 16th November, 2023. Loans like MSME loans, vehicle loans, housing loans, education loans would also be thus impacted. Therefore, RBI is requested to exempt those bank funds to NBFCs which are used to on-lend to the above said sectors, from the increase in risk weight.

  2. Need to Reduce Risk Weight on Loans which Carry Low Risk – Harmonize with Bank Norms

    While, RBI has increased risk weights on certain category of loans that are considered to carry “high risk” like real estate, consumer credit etc., the risk weight on those categories that are considered to carry “low risk” like auto loans, equipment loans, housing loans etc. , continue to be subject to a risk weight of 100 for NBFCs, while it is lower for banks. This also goes against the RBI’s stated policy to “harmonize” regulation of NBFCs with that for banks.

    Therefore, risk weights on loan categories like auto loans, equipment loans, housing loans etc. which carry “low risk” should be reduced to 50 or 75 based on their risk perceptions. Thus, NBFCs should also be given the benefit of differential risk weights as is available to banks.

  3. Need to Reduce Overdependence of NBFCs on Banks – Refinance Window is the Need of the Hour

    RBI Governor has voiced concern on the overdependence of NBFCs on banks for funds. This is something that the NBFC sector has also been requesting for the last few years now. There is a crying need to diversify funding sources available to NBFCs. Capital market funds are an option available but only for the highly rated large NBFCs as it is unviable for a large number of small and mid-sized NBFCs . There needs to be a fund source that is not only accessible and affordable, but also provides the Govt / RBI a direct handle.

    Therefore, there is an urgent need to create a “Refinance Window” for NBFCs on the lines of National Housing Bank. Financial Institutions like SIDBI can play the role of a Refinancing body for NBFCs. This has been a long-standing demand of the NBFC sector.