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Thirty-Second EGROW Shadow Monetary Policy Committee Meeting on February 2, 2024


Recording of the event

Key Takeaways

  1. Indian economy is performing better than anticipated.
  2. Inflation is still not at the pivot.
  3. Global uncertainties can cause upward pressure on inflation.
  4. Liquidity is tight in the market and needs to addressed.
  5. India is now in the electoral cycle.
  6. Increased capital expenditure of the Government is leading to crowding-in.

Recommendations of EGROW Shadow MPC

Members of EGROW 5
Repo Rate

Pause – 5
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

The Interim Budget has been announced yesterday with nominal growth projection at 10.5 percent for next year and GFD at 5.1 percent, continuing the fiscal glide path to 4.5 percent in 2025-26. In the current year, Indian economy is performing better than anticipated.

The real GDP growth rate at 7.3 percent has exceeded the expectations. That India has recorded growth rate of 7+ plus percent in the last 3 years, against all odds, domestically and globally, is worthy of appreciation.

Tax collection of the Government during the current year has also been very encouraging. The financial sector, including banking has recorded lowering of stressed assets and robust profits. The industrial performance, measured in terms of IIP, core industries and other high frequency indicators, as well as services sector is also performing well.

Globally, in view of the continued uncertainty, major central banks have retained the heightened policy rates despite moderation in inflation. The oil and gold prices are also expected to moderate in the next few months.

India is now in the electoral cycle and therefore, there is need for stability in the economy. The interim budget has also ensured that continuity. The tax rates have also not been changed. Inflation continues to be higher than 4 percent and towards the upper limit of the band. There is a positive trend in investment, as encouraging signs of crowding-in are recorded. The Government has further enhanced capital expenditure which would strengthen capital formation.

In view of the above, my expectation and recommendation is that the interest rates should not be changed in February RBI policy. In April 2024, with the borrowing program of the Central government for next year being lower than the current year, RBI may consider lowering of the Repo Rate.

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

We are calling for a 0.5 percent of bank book CRR cut on Feb 8 to address tight liquidity and 25bp RBI rate cut in April.

We think it is time for the RBI to shift gears. The Government has embarked on the path of fiscal consolidation. Second, the Fed is slated to cut 75bp in 2024. Finally, inflation is within the RBI's 2-6 percent mandate, pushing up real rates.

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

The still-to -achieve durable 4% future inflation trajectory is likely to keep RBI on hold in rates and stance. However, we expect the tone of the policy statement to remain fairly balanced. While the real policy rates remain clearly higher than Suitable levels for the economy, but with the Indian economic indicators firing from all sides, we see some more ability for India to withstand higher positive real rates before structurally weighing on long term growth prospects.

Meanwhile, a key point of concern is the the persistent liquidity tightness in the banking system as reflected in the significantly high credit-deposit ratios—which is turn is putting pressure on deposit rates. Some frictional liquidity tightness due to lack of government spending is being bridged by variable repo auctions. However, with government not spending adequately for quite some time persistence of tightness has kept overnight rates hovering 25-30bps higher than the repo rate. Before easing on stance and repo rate, we expect the RBI to slowly manage liquidity through measures which should get overnight rates closer to repo rate. In the next 2-3 months we see this play out, with greater government spending and RBI intervention from FPI flows easing liquidity. However, higher currency leakage ahead of elections will offset part of this easing. We will need to monitor the structural liquidity deficit in months ahead to see whether RBI needs to step in with measures beyond frictional management.

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

Liquidity tightness continues but this may be temporary. Therefore, the RBI may not choose to reduce the CRR which is a long-term measure. RBI may prefer long term VRR. US may not cut policy rate before June 2024. In view of the past experience, RBI will prefer to match the US rate cut. Therefore, no change is expected or recommended in repo rate in Feb 2024.

Guest Panelists – Specialists from Market and Members from ASSOCHAM

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

The recent discussions centered around the vote on account and monetary policy. The vote on account emphasizes essential expenditures and reflects confidence in the economy with increased capital expenditure. Monetary policy aims to maintain stability in the federal funds rate, considering concerns like inflation and volatile food prices. Colleagues stress the importance of monitoring inflation and liquidity constraints in PSU banks, advocating for a cautious approach to rate adjustments. In summary, while challenges persist, a balanced and vigilant approach is crucial in navigating economic policies effectively. In brief, there is a consensus for no reduction in the interest rate, with an expectation to follow the current monetary policy direction.

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

Expect a continued hawkish pause from the RBI in the upcoming monetary policy as well.

We still expect RBI Repo rates to remain unchanged all through FY24.

We still expect the start of the RBI's rate cuts to begin end-Jun'24 quarter.

The rate cut cycle would be shallow and not more than 50-75bps.

However, if the start of the Fed's rate cycle is delayed, it would delay the start of RBI's rate cut cycle as well.

The two primary drivers of the RBI's action on the Repo rate remain the Fed policy and India's trade deficit (currently elevated).

Bond inclusion is an appreciable positive, but the related flows would only come during Jun'23 quarter of next year.

Any FII inflow momentum India may receive at that point in time would be largely mopped up by the RBI to strengthen its forex reserves.

Therefore, do not expect any notable appreciation in the Rupee; only a softer level of depreciation.

GDP growth in India must be seen using 4Yr percent CAGR and sequential momentum. Both suggest resilience with growth broadly flat from Q4FY23.

High frequency numbers show more strength and resilience than seen in the GDP numbers.

Finally, on rural demand, while the poor rains are likely to see a drop in yields, strong rural wage growth and rural spends could likely offset the negative impact.

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

In my view the repo rate and stance should remain unchanged as the inflation is still hovering on the higher side of the band. Food inflation should ease in the coming months but the geopolitical concerns i.e. Russia related sanctions as well as the Red sea tensions may further impact crude prices hence my view the RBI should keep the rates unchanged for the time being.

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

CPI increased to 5.7 percent YoY in December vs 5.6 percent YoY in November. On a sequential basis, the CPI index declined by 0.3 percent. The arrival of winter crops helped in easing the pressure on vegetable prices that declined by 5 percent MoM. Food inflation also drew support from the decline in fruits and spice prices. The achievement of the monetary policy has been to sustain a drop in core inflation with monetary conditions remaining restrictive.

On the growth front, India is estimated to have grown by 7.3 percent in FY24 after a 7.2 percent growth in FY23. Even as monetary policy has been tightened by 250 bps, there has been no significant negative impact on growth dynamics.

However, it is important to note that the government capex growth has been significant, and continues to be the dominant driver of growth, while consumption expenditure lags.

Importantly, rural indicators continue to exhibit weakness as reflected in 2W sales, rural wage growth and higher demand for MNREGA jobs.

Given the uncertainty in demand, private capex has not picked up significantly barring few sectors to continue thrust

Against this background, we expect the government to continue its thrust on capital expenditure in FY25. We expect Indian economy to grow at 6.9 percent in FY25 vs 7.3 percent in FY24 (1st advance estimates)

Overall, we think that the fiscal policy is not inflationary, and the monetary policy can continue its course towards keeping its policy can continue its course towards keeping its policy stance restrictive, unless there is a clear consensus on the glide path towards the central line of 4 percent. Global food supplies can remain volatile owing to global climate changes. The monetary authorities will also have to watch out for volatility in commodity prices. The monetary authorities will also have to watch out for volatility in commodity prices due to the global geopolitical risks, especially the current heightened disturbances in the Red Sea.

On Liquidity

As of 30th January 2024, LAF liquidity deficit stands at INR 2.7 trillion on back of the lower spending the central government. Central government’s cash balance with RBI stands at INR 4.7 trillion; and we expect the liquidity tightness to persist as the government is focused on containing the fiscal deficit in FY24 and carry forward a large cash balance to the next fiscal year. Similarly, as we are approaching the general elections, higher currency in circulation could put further pressure on the system liquidity. On the other hand, liquidity can improve if the RBI absorbs the higher FPI inflows (that will be coming ahead of the JP Morgan bond inclusion starting in June 2024) to prevent any sharp appreciation of the INR. Similarly, we expect credit growth to moderate in the coming months that would minimize liquidity tightness.

Implication for monetary policy action

We do not see any immediate case for the RBI to cut rates or change the stance. 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”. As long as growth recovery holds up, monetary policy focus will remain on keeping on inflation pressures contained. The guidance of the RBI towards achieving the stated targeted of 4 percent should continue.

A critical problem globally is that the markets have been running ahead with expectations of rate cuts. While we think this is so much of a problem in India, the communication strategy of the RBI needs to stay strong to prevent the market from mispricing the timing of the rate cuts by the RBI.

We expect the first rate cut by the Fed to June 2024. Consequently, we expect the RBI to follow the Fed to June 2024. Consequently, we expect the RBI to follow the Fed and not precede it in the rate cutting cycle and start easing the rates starting the timing of the rate cuts by the RBI.

We expect the first rate cut by the Fed to June 2024. Consequently, we expect the RBI to follow the Fed and not precede it in the rate cutting cycle and start easing policy rates starting August 2024.

We expect the rate cutting cycle to be shallow at 50(our base case)-75bps

While it is understood that there can be many exogenous factors that determine the liquidity that there can be many exogenous (including FX flows), the RBI needs to be guiding the market towards neutrality liquidity zone of +/- INR 50000 crore. This is likely to anchor the overnight rate to the repo rate 6.5 percent. Currently, the overnight rate is higher and more hugging the MSF rates thereby creating the perception of back-door rate tightening.