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Thirty-Third EGROW Shadow Monetary Policy Committee Meeting on March 28, 2024


Recording of the event

Key Takeaways

  1. The economy is performing better than expected in the last few months. The projections are being revised upwards.
  2. The economic growth and investment are high and following economic theory this cannot continue for too long.
  3. Inflation, domestically and globally, is benign.
  4. Foreign exchange reserves in India are adequate and exchange rate stable.
  5. FDI and FPI are high in recent months.
  6. RBI has adequately managed the liquidity in the system.
  7. In European countries there is a slowdown while in US growth is high.
  8. India and the US are in midst of an electoral cycle.
  9. India may like to follow the rate cut in the US.

Recommendations of EGROW Shadow MPC

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

Guests — 3
Repo Rate
Pause – 3
Decrease – 0

Detailed Views by Members of the EGROW Shadow MPC

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


To take any further action, necessary to wait for more clarity on inflation, and inflation dynamics, which will only be possible once unit level CES (Consumption Expenditure Survey) data are released

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

The monetary policy announcement in April is very important as it lays the foundation for the year ahead. In the election year this becomes a bigger challenge due to additional uncertainties. Further, India is integrating rapidly with rest of the world and as the global economy is charting an uneven growth path, with some economies fearing a recession

The Indian economy is performing better than expected in the last few months. In Q4 of 2023-24, growth rate of 8.4 percent exceeded the best expectations. This high growth rate is expected to strengthen further in future with Gross fixed capital formation higher at 34 percent. The growth rate in industry is high based on data on core industries and index of industrial production. In the case of core industries, coal, steel, cement, natural gas, electricity and crude oil are recording higher growth than the previous year. In the case of coal and steel, the growth is in double digits. The combined index of core industries increased by 3.6 percent in January 2024 as compared with January 2023 and growth during 10-months, April to January, is 7.7 percent. The index for industrial production also recorded a growth of 5.9 percent as against 5.5 percent in the previous year. However, the Agriculture sector could be a cause of concern as water level in the reservoirs is low and monsoon could be impacted due to El Nino effect. In the economy, construction, trade, hotels, financial sector and real estate are performing well. In terms of high frequency data, sales of private vehicles, 2- wheelers, passenger vehicles, and cargo handled at different ports, sea and air, are also recording high growth. The specific sectors recording high growth are jewelry, sports goods, footwear, consumer durables, and restaurants.

The headline consumer price index in February 2024 is within the stipulated band but for food items at 8.7 percent is a matter of concern. The prices of vegetables, pulses, eggs, and spices are high in the month of February 2024. In contrast, the wholesale price index continues to be benign.

The fiscal situation is robust with GST collection at Rs. 1.7 lakh crore in February 2024 and Rs.18.4 lakh crore during the last eleven months. GST collection from domestic sources has increased by 13.9 per cent while from external sector, growth rate was 8.5 percent.

The external sector poses a challenge as growth rates of GDP in most of the advanced countries is below the pre-Covid rates. This implies that India’s exports will continue to face stiff challenges. This was substantiated by the trend of exports in the overall BOP data where exports were lower than imports, leading to higher trade deficit. Higher exports of services and IT related activities helped to restrict current account deficit to 1.2 percent of GDP. In the case of main items recording robust growth are engineering goods, electronics, chemicals and pharmaceuticals amongst exports, and gold, silver and machinery in imports.

The expenditure on MGNREGA in recent months is higher because of low demand for labor in agriculture. In recent months, there has been normalization of global supply chains which is leading to easing of commodity price pressures in the country.

There are different types of risks that the economy has to be prepared for: slower than anticipated global economic growth; high commodity prices with price of oil turning northwards; and tight financial markets. India also needs to strengthen the infrastructure, develop skill for its manpower and help the labor force to achieve its growth potential.

In view of the election cycle in India followed by that in the USA, changes in the policy rate could be a challenge for the economy. While in general, inflation is lower than the heightened peaks of yester months, it is still not ranging within the prescribed band. Hence, the anticipated lowering of the policy rate can be paused for trends to stabilize.

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

We expect the RBI MPC to pause in April and cut 100bp by June 2025. This assumes the Fed cuts 75bp in 2024.

Domestic inflation argues for lower rates with the real repo crossing the 1 percent deemed neutral. Growth is also slowing.

The challenge is the Fed response to upside surprises to inflation. To support the INR, the RBI evidently does not want to cut before the Fed commits a date.

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

We expect the MPC to maintain a status quo on rates and stances in the upcoming policy. The resilient domestic activity indicators, coupled with uncertainty on food and energy prices should keep the tone fairly cautious. Further, the Fed’s guidance on push back of rate cut cycle will keep the RBI wary. The recent global risk-off and the consequent weakness in INR will also keep RBI stay pat. While policy rate is expected to remain unchanged at least through 1HFY25, RBI is expected to continue to focus on liquidity management closely, to ensure overnight rates remain closer to the Repo rate. We expect liquidity conditions to remain benign in 1HFY25 driven by muted currency leakage and FX intervention in the backdrop of expected heavy capital inflows. This should keep the RBI using regular VRRRs to manage the overnight rates closer to repo rate. We, accordingly, see room for policy stance change to neutral in the June policy.

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

The current configuration of inflation and growth does not call for an immediate rate cut. However, given the direction of inflation --particularly core inflation-- and some headwinds for growth in FY25, the RBI must create room to pivot towards a more accommodative stance. This would mean a change in stance to neutral in this policy or in the next (if so the RBI must prepare the ground in this policy itself).

The improvement in liquidity is welcome and the RBI would do well to keep it at a mild deficit and guide the overnight rate to the policy rate instead of keeping it elevated above it. More importantly, frictional liquidity shortages, though temporary in theory, lead to extreme volatility in short end pricing of assets and liabilities. The RBI could resolve this by signalling the level of LAF balance it would ideally like so that market expectations remain stable.

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

I believe that the overall inflation outlook is relatively stable, despite the increased volatility in food prices. The global commodity market remains relatively benign, with anchored commodity prices and no major signs of fiscal profligacy. The liquidity injection by RBI has been conservative, leading to low inflation and stable global demand.

Looking ahead, I anticipate a neutral stance from RBI and a cautious approach to GDP growth forecasting, especially considering the dynamics of consumption and investment cycles. Overall, I expect inflation to remain benign, with RBI likely to hold off on rate cuts until August 2024.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

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

The repo rate has remained unchanged at 6.5 percent. There was an increase of 250 basis points from May 2022 to February 2023. In the FY24 and FY25, it is expected that RBI will cut rates starting from June 2024. It is expected that these rate cuts will amount to approximately 75 basis points over three to four cuts. Additionally, inflation projections for FY24 and FY25 indicate an average of 4.5percent, with quarter-wise projections as follows: 5 percent for Q1, 4 percent for Q2, 4.6 percent for Q3, and 4.7 percent for Q4. Based on these projections, there is a suggestion that RBI may consider changing its accommodative stance to a neutral stance in the upcoming meetings. This could be followed by a possible reduction in interest rates by 25 basis points in subsequent meetings. Overall, indicators suggest a positive outlook for the economy, with GDP expected to range from 7.5 percent to 8 percent for FY 23-24 and around 7.7 percent for FY 24-25 as predicted by various economists.

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

Continue to see the RBI on a hawkish pause

Growth continues to hold up and headline inflation stickiness remains. Both reasons for the RBI to hold on to rates

Fed rates and the Rupee continue to remain key variables driving the RBI's policy stance

Fed appears to be veering towards pushing its rate cut cycle further into the year. If this happens, RBI's rate cut start would also be delayed and backended

Continue to see barely any rate cycle ahead in FY25; only to the tune of 50-75bps

However, recent macro numbers are pushing us in the direction of 25-50bps of rate cuts instead

Rate easing if any could come in the form of soft market rates in the quarters ahead, provided inflows into India witness a pickup, giving the RBI the opportunity to buy dollars and support liquidity

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

Domestic economic growth has been steady despite global headwinds, the Q3 FY24 GDP growth was pegged at 8.4 percent which was above expectations.

CPI Headline inflation remained almost similar to February at 5.1 percent while the core inflation dipped to a low of 3.3 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 remaining high at 7.8 percent. The geopolitical concerns i.e. Russia related sanctions as well as the Red Sea tensions can further impact crude prices hence my view they RBI should keep the rates unchanged for the time being.