"What a wise man does in the beginning, a fool does in the end."
RBIs beginning remarks state that Major Central Banks have kept rates on hold while refraining from forward guidance in view of prevailing uncertainties and that's what RBI did too.
RBI announced the monetary policy decision on Friday. The Repo rate was kept unchanged and the monetary policy corridor with SDF at 6.25% and MSF at 6.75% retained. The withdrawal of accommodation stance was maintained.
The growth projection for FY 2024 was revised higher by 50 bps to 7% and Dr. Patra suggested that the growth outturn could be higher based on high frequency indicators in Oct and Nov 2023.
Inflation projections for FY 2024 were retained at 5.40%. For next FY, Inflation is seen to average 5.20% in Q1 and decelerate to 4% in Q2 before reaccelerating to 4.70% in Q3. The risks to the inflation outcome come from uncertainty in food prices. Rabi sowing of wheat, pulses and spices need to be closely monitored. The trajectory of food inflation needs to be closely monitored and monetary policy has to stay alert to the risk of such shocks becoming generalized and derailing the ongoing disinflation process. In the press conference, Governor reiterated that reaching 4 percent inflation should not be a one-off event. It should be at 4% on a durable basis. And the MPC should have confidence that 4% has been reached durably
The projections suggest that the first cuts could come in Q2 FY25.
In terms of data, Oct inflation came in at 4.87% and Q3 RBI estimates are at 5.60%. It can be implied that RBI sees inflation around the 6% level in Nov and Dec. They make a mention of the same in the policy statement - "Intermittent vegetable price shocks could once again push up headline inflation in November and December."
Liquidity conditions tightened over the last 3 months in line with the stance of monetary policy due to currency leakage , government cash balance and RBIs market operations. As liquidity turned neutral, going forward , it is expected to ease further on government spending.
In the 6th Oct policy, RBI had suggested OMO sales to manage liquidity consistent with the stance of monetary policy. In this policy, RBI explained since liquidity had evolved consistent with the policy stance, the need for OMOs had not arisen but the tool remains very much on the table.
In the concluding remarks, anchoring expectations amid an uncertain global economic outlook was the key message. A few months of good data should not lull the CB into complacency while being mindful of risk of overtightening and new shocks that could hit the economy. Since future is more uncertain, every action is to be thought through from the lens of macro economic and financial stability.
The policy was a balanced one but leaning dovish on the fringes.
What other market participants think ?
The opinion seems to be largely divided with varying calls of a 50 bps of cuts in FY 2025 on the one hand and 100 bps of cuts in FY 2025 on the other hand. But there appears to be consensus on the timing of first rate cuts in June 2024.
Looking at the inflation projections, Real Rates peak in Q2 FY25. Election uncertainty will be out of the way by then, USD inflows will likely be more robust as bond index inclusion gets underway and US Interest rate cut cycle will likely be underway. That sets the backdrop for start of rate cut cycle in India. With Q3 FY25 inflation projection at 4.70% and Repo Rate at 6.50%, the real rate will be 180 bps. If the GDP growth evolves on expected lines and there are no macro economic shocks, I personally think we get 75 bps - 100 bps of rate cuts in FY 2025.
The chart below shows rate cut cycle and the extent of rate cuts.
However, if we witness significant deterioration in Global Economic Outlook and downside risks to Domestic Economic activity increase that's when the market pricing of rate cuts materially changes from current 50 - 100 bps to more in the range of 150 - 200 bps. However, if we get a simple pivot as Inflation and Growth projections evolve on expected lines, rally in rates will be more limited.
On another note:
RBI allowed a reversal of liquidity facilities under both SDF and MSF even during weekends and holidays with effect from December 30, 2023.25 to facilitate better fund management by the banks. This measure will be reviewed after six months or earlier, if needed. At present, the standing facilities of the Reserve Bank under the LAF – the SDF and the MSF – can be availed from 17:30 hours to 23:59 hours on all days including weekends and holidays. However, the reversal of the facilities – withdrawal of deposited funds for SDF and repayment of borrowed funds for MSF – for the transactions over the weekends and holidays, is available only on the next working day in Mumbai.
Market Price Action
Price action was fairly muted post the the policy.
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