Recording of the Event

Key Takeways

1. Global uncertainties have increased.
2. Oil prices are expected to increase.
3. Durable inflation control domestically and globally may not have achieved.
4. In India inflation (as measured by CPI) is less than 4 percent only for last two months. However, in those two months food inflation has been higher than 5 percent.
5. Deposits are lagging behind credit.
6. The diversion of money into Mutual Funds could be the amount normally gets invested in fixed deposit.
7. Foreign exchange reserves are at comfort level with nearly 12 months of import cover.

Recommendations of EGROW Shadow MPC

Members of EGROW — 6
Repo Rate
Pause – 3
Decrease – 3

Guests — 4
Repo Rate
Pause – 4
Decrease – 0

Detailed Views by Members of the EGROW Shadow MPC

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

There are several signs indicating increased global uncertainty and the likelihood of inflation falling further - worldwide and India. If a no-change no cut monetary policy is pursued, I am afraid we are following the 2018-19 model of monetary policy - and we know how badly it ended with GDP growth declining to 3.7 % in 2019-20.

2. Shri Indranil Sen Gupta, Professor of Practice of Economics, Shiv Nadar University

We expect the RBI MPC to cut the rate by 25bp with the Fed commencing rate cuts. Inflation remains benign pushing up real rates. Growth is slowing. Given persistent rise in lending rates, we expect the monetary policy stance to shift to neutral.

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

We expect the MPC to maintain a staus quo on rates as it evaluates the ongoing near term risks from geopolitical turmoil and volatility in perishable food prices. However, we believe the preconditions for the beginning of monetary easing are set given Feds rate cuts and RBI allowing comfortable liquidity surplus. This assigns a high probability of change in stance change in the upcoming policy followed by rate cuts from December.

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

The Fed’s supersized rate cut has set the stage for the beginning of a cutting cycle for all central bank’s. The RBI thus has to pivot to some degree, perhaps not through an immediate rate cut but possibly a change in stance or the tone of communication. That said, current geopolitical conditions call for caution as risk of sustained capital flight increases.

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

There should be no change in the policy rate at this time; however, the overall stance may need to be moderated. The rising geopolitical tensions and significant stimulus from China could potentially drive up commodity prices including oil. Additionally, the expansion of reserve money has been limited, leading to low liquidity in the system. This liquidity shortage is particularly impacting the credit market.

Given that there is a substantial proportion of demand deposits, it is essential to inject liquidity into the market. Fortunately, both the fiscal deficit and the current account deficit remain well under control, so it is easier to control liquidity.

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

The Indian economy is performing better, recording double the average of global growth rates. Global uncertainties have intensified in recent days, after the Fed Reserve reduced its policy rate, mainly because of the intense conflict in Middle East, ongoing conflict in Europe, and the upcoming elections in the United States.

In the first quarter of 2024-25, agricultural growth moderated to 2 percent, year-on-year, down from 3.7 percent a year earlier, largely due to a decline in rabi food grain production linked to lower water levels in major reservoirs and river basins. Further, climate change remains a pressing concern, particularly for the agricultural sector, which is still highly dependent on rainfed irrigation. In the industrial sector, while mining, manufacturing, and electricity are performing well, core industries such as natural gas, coal, and cement are facing some challenges. Conversely, in the services sector, aviation and air cargo have shown improvement and the services sector's Purchasing Managers' Index indicates strong performance.

In the financial sector, deposits are lagging behind the credit growth suggesting that funds are being redirected into mutual funds. The banking industry is robust as NPAs are recording lowest figure in a decade. On the prices, although the overall Consumer Price Index (CPI) remains comfortably below 4 percent, for the last 2 months, but food prices have continued to remain above, and have recently surged to 5.6 percent. The CPI for industrial workers has remained low at 2.44 percent. The WPI has not followed any specific trend though it is low and below 2 percent for all commodities but food prices are notably high at 3.26 percent. Additionally, the WPI for vegetables and oils continues to be elevated.

On the external sector, the foreign exchange reserves are strong providing for one year of import cover which is robust. Recently, the U.S. Federal Reserve aggressively cut interest rates by 50 basis points, marking its first reduction in four years, while the European Central Bank also lowered rates by 25 basis points. Interest rates in Australia and China remain unchanged, whereas Russia has raised its rates by 100 basis points, marking the seventh increase in over a year. Inflation in the U.S. and Eurozone appears to be under control, but rising tensions in the Middle East are likely to drive up oil and gold prices. Hence, how long the price level would reign in has yet to be determined.

High interest rates have been curtailing growth so a reduction in the interest rate will give impetus to green shoots in the economy. A cut in interest rates in October is essential to support growth in the current subdued economic climate. Though India is recording a high growth of 7 percent (highest in the world) but the potential, given the young demographics and dynamic policy changes is above 9 percent. Thus, high interest rates can deter investment in consumer durables, housing sector and industry which can result in high sacrifice ratio. To correct this anomaly, lowering of interest rates should be considered soon.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

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

RBI will not change the policy rate. According to Bank of Baroda’s research report the RBI will keep the policy rate unchanged. Since last two months inflation has been low. This year, the monsoon has been favourable, contributing to stable prices for new crops and vegetables.

Economic indicators point towards a promising GDP growth forecast of between 7.3 percent and 7.4 percent. So far, Goods and Services Tax (GST) collections have been robust, and the services sector's Purchasing Managers' Index (PMI) reflects positive performance.

While the RBI is anticipated to reduce rates starting in December 2024, it is noteworthy that if the current rates remain unchanged, this would mark the 10th consecutive instance of the RBI opting not to alter the policy rate.

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

• Our base case view on the RBI monetary policy remains the same - expecting a continued pause atleast until the Feb’25 Union budget.
• We thought the Fed would cut only in early 2025, but the rate cut is already through, with 50,100, 50 expected.
• However, we continue to see a soft landing in the US, so don’t expect the RBI to be aggressive in its rate cut cycle starting next year and would probably be shallower than broad expectations.
• We feel the RBI will remain concerned around the trajectory of food inflation and also be pre-occupied with global uncertainties around China stimulus, its impact on India flows, ongoing geopolitical underpinnings and finally the US election outcome.
• While growth appears to be holding up for India, short frequency indicators seem a bit mixed. There is normalisation seen in a number of indicators like credit growth and PMI indices. However, PV and CV sales continue to remain weak also rubbing off on a drop in diesel sales.
• 2W sales are expected to see some pickup with support from the underlying festive season and tractor sales are witnessing some pickup in momentum.

This Dec’24 quarter therefore will be key for the RBI to review its growth forecasts and help the RBI decide if it would need to start its rate cut cycle ahead of our expectation of post Feb’25 union budget.

3. Shri Manish Mathur, Country Manager- India Doha Bank

The Indian economy is growing at a decent clip and though am interest rate cut at this stage could trigger a faster growth, it is important for RBI to maintain its credibility related to controlling inflation between its target band of 2-6%. Given that food inflation is still not under control and the global economy is facing headwinds on account of the unrest in Middle East and Ukraine, there is a potential for inflationary pressures on the economy through impact on oil prices. Further, the stimulus from China could lead to an increase in commodity prices, which could also impact inflation levels in India adversely. In this background, I feel that will be prudent from RBI to maintain the repo rates at current levels and maintain its stance.

However, from a banking industry perspective, deposit growth is under pressure and that will impact the Bank’s ability to participate in investment requirements of the industry to support the growth in the economy. We therefore feel that RBI could consider offering temporary leeway to Banks on CRR/ SLR on incremental deposits to allow banks to offer more competitive rates and wean investors away from the stock market to some extent.

4. Shri Sujit Kumar, Chief Economist, NABFID

• Between August bimonthly review and now, there has emerged clarity on three aspects, viz. US Federal Reserve likely rate action, monsoon progress, and constitution of new monetary policy committee.
• The US Fed has acted decisively with 50 basis points cut, monsoon outturn has been better than normal, with reservoir levels promising better prospects for rabi season.
• The new MPC could not have asked for better conditions to make a policy decision especially with inflation prints sub five percent for last one year, external sector comfortably positioned with current account deficit about 1% of GDP and forex reserves at all time high.
• Economic gowth meanwhile has been weaker sequentially in H1FY25. It could improve somewhat in H2 with Government capex resuming post Monsoon and festive season lifting consumer demand.
• The liquidity meanwhile has turned comfortable and could remain so as credit growth moderates while deposits pick up.
• The case for RBI easing monetary stance and cut policy rates couldn't be more pronounced. With real rates hovering above 2%, a sustained caution on inflation could inflict a growth toll, which is unwarranted. By sounding caution on inflation risks often, the RBI seems to have more confidence in its growth forecast than inflation, which it continues to see below 5% for the year ahead.

While RBI may not change policy rates in upcoming policy review, it should better change stance to neutral. This will be in consonance with its tolerance of surplus liquidity conditions.