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Thirty-Fourth EGROW Shadow Monetary Policy Committee Meeting on June 3, 2024


Recording of the Event

Key Takeways

  1. Liquidity is a concern.
  2. Mild increase in liquidity brings in immense uncertainty in the market.
  3. Unless liquidity management provides stability, there would be instances where some banks may raise rates on deposits.
  4. RBI needs to guide markets.
  5. Credit offtake maybe slower during the year.
  6. RBI may not wait for US Fed to start the rate cut cycle.
  7. Given the inflation rate in the range of 2% to 3% in Euro area and UK, Europe may take a lead in the reduction of interest rates.
  8. Should the RBI consider revising 4% of CPI as the pivot for IT?

Recommendations of EGROW Shadow MPC

Members of EGROW 6
Repo Rate
Pause – 6
Decrease – 0

Guests 4
Repo Rate
Pause – 4
Decrease – 0

Detailed Views by Members of the EGROW Shadow MPC

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

This is the first monetary policy after election results. It is expected that there would be no change in Repo Rates. The Indian economy is performing reasonably well with a GDP growth rate of 8.2 percent in the previous financial year 2023-24. The gross fixed capital formation is in the range 33.3 percent to 33.5 percent aided by capital expenditure of Central Government. The growth rate in the manufacturing sector and construction is 9.9 percent and that in Financial Real Estate is 8.4 percent. In the case of core industries, cement and steel, have recorded high growth with 9.0 percent and 12.4 percent, respectively. Industrial sector is expanding robustly with the Index of Industrial Production (IIP) recording a growth of 5.8 percent in 2023-2024 as compared with 5.2 percent in previous year. The performance of mining and manufacturing sectors during the year was encouraging. The latest trend in IIP for data available for March 2024, shows a significant positive trend for manufacturing and electricity.

The rise in price level as measured by Consumer Price Index (CPI) and Wholesale Price Index (WPI) are benign but the food WPI has a major issue as the prices of both, potato and onion, have increased. The prices of potato increased due to unseasonal rains in December 2023 which had hampered its production. While the onion prices increased due to lifting of export ban on onions. The CPI is 4.83 percent and WPI is 1.26 percent in April 2024. The food CPI is high (8.7 percent) which is again a cause of concern.

The foreign exchange reserves at US $ 646.67 Billion are adequate with the import cover at 11 months. The exports are doing reasonably well despite global challenges, and the imports continue to increase which is a cause of concern as the Current Account Deficit could widen. The oil prices are stabilizing with $80 to $ 85 a barrel and India imports oil largely from 3 countries Russia, Iraq and Saudi Arabia. In recent years, oil imports from Russia are four times that from Saudi Arabia and double that from Iraq. Gold indicates an increasing level of uncertainty in the market. The gold prices are very high at US $ 2327 per ounce in May 2024 compared with US $ 1855 per ounce in February 2023 at the start of Russia – Ukraine war. The external sector is expected to do well and FDI inflow is expected to improve with high growth rate in India.

The United States will not cut the interest rates immediately due to elections as well as inflation at 3.3 percent is above tolerance band of 2 percent. In Europe and UK, inflation is less than 3.0 percent and therefore, probability of a rate cut is high in near future. Among the emerging countries only Brazil has started the rate cut the interest rates.

India’s performance, on quarterly basis, has been very high in 2023-24 with 8.2 percent in Q-1, 8.1 percent in Q-2, 8.6 percent in Q-3 and 7.8 percent in Q-4. The higher growth trend could continue in the next year. The high performance indicators like bank deposits and bank credit are performing robustly. In agriculture sector, the fear of El Nino effect is receding. Therefore, agriculture should perform better next year. The latest Annual Report of the RBI released on May30, 2024 provides an excellent analysis of global and domestic situation. India has been performing well while other countries are facing aftermath of covid pandemic.

In year 2024-25, certainly India is going to have higher growth than the projected 7.0 percent. India can grow above 8.0 percent if investments are encouraged and so rate cuts are essential. The timing of the rate cut is crucial. In view of the election results, the rate cut in June may be too early. Also, as per the evidence, Repo Rate has been following the Fed rate. The US Fed has new compulsions in addition to inflation more than 3 percent, and not expected to be abetted soon. The US election cycle will pick up by September 2024. The RBI has a window to decouple, which it should sooner than later, by August 2024. Though India is growing at 8.0 percent, the potential is still higher. The lower interest rate should ensure higher investment, especially from the private sector, to take India to higher GDP growth in the range of 8.0-9.0 percent. Therefore, rate cut could be considered in August 2024.

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

Change stance to neutral with an eye on cutting the policy rate in August. Lower cost of capital is critical for private investment recovery.

Have a clear, transparent and stable liquidity policy to remove funding uncertainty for banks.

Tackle credit bubbles through prudential norms, not sticky policy rate.

Shift away from a single-minded focus on achieving 4 per cent CPI inflation. Emphasize direction of inflation rather than level.

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

We expect the MPC maintain status quo on rate and stance in the upcoming policy. The robust GDP growth continues to point towards upside risks to core inflation. Further the recent upswing in input prices and uncertainty on food inflation will keep RBI wary. Meanwhile, RBI will need to manage liquidity very closely as the huge swings cause enough risk premium on money market rates. We expect the liquidity conditions to gradually begin easing and become significantly surplus in 2QFY25, which may prompt RBI to introduce liquidity absorption tools capping the gains across the curve.

While Fed decisions remain one of the drivers, RBI may decouple and consider monetary easing only if last mile 4% inflation target seems convincingly achievable.

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

The monetary policy stance is neutral. There has been easing of liquidity side because of transfer of large surplus from RBI to the central government. There is also an extra bit of hesitation on the side of RBI on easing out rates. The growth in India seems decent. Credit growth is expected to slow down, particularly in retail lending, though the RBI may not be concerned about this trend.

5. Shri Indranil Sen Gupta, Head of India Research, CLSA

Called for 25bp RBI cut in October and 100bp by June assuming that the Fed cuts from November.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

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

The Repo Rate should remain as it is. India’s GDP growth rate was 8.2 percent in 2023-24. The GDP is expected to grow by 7 percent in the financial year 2024-25. RBI will have to be cautious to balance growth and inflation. Also RBI has brought in 100 tons of gold from United Kingdom (UK). So we can expect long term economic growth.

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

Domestic economic growth has been steady and above expectations.

CPI Headline inflation has come down marginally to 4.8 percent

In my view the repo rate and stance should remain unchanged as the inflation is still hovering on the higher side of the band with Food inflation still high. The geopolitical concerns are still an issue hence my view the RBI should keep the rates unchanged for the time being.

3. Rajan Pantel, Executive Director, Yes Bank

Core CPI inflation is on moderate track. Vegetable prices increases mutated against historical prices. India has shown GDP growth of 8.2 percent in 2023-24 and will be growing by 7.1 percent in 2024-25. The liquidity was tightened in May 2024 and tax collections were also very high. However the Fed is going to go slow in increasing the rates.

In MSME sector the input cost has gone up especially that of raw material and cost of finance due to this their margins have considerably sunked. The credit growth on retail side will be moderate. Also the consumption has gone up and saving is declining.

4. Sh. Arjun G Nagarajan, Chief Economist, Sundaram Mutual

Continue to see a hawkish pause from the RBI, given continued uncertainties globally.

The Fed's policy, rupee strength and domestic growth would continue to be the three variables on the RBIs mind that would determine the start of India’s rate cuts.

Core inflation appears to be responding to the RBIs earlier rate hikes. But given domestic strength, and no start to the Fed's rate cuts till 2025, the RBI would not look to ease rates for most of FY25, with a small probability of a 25-50bps token cut after the 2025 budget.

Positive macro narratives have seen an appreciable drop in India’s 10y yield in May. Going forward with more FII inflows into debt (if hopefully not offset by equity outflows) from the JPMorgan bond inclusion, the RBI would buy into this to increase their Forex reserves. This is likely to lead to a situation of comfortable domestic liquidity that is not likely to get entirely sterilized, easing the short end of the yield curve.