What could shape RBI's monetary policy verdict: Experts weigh in

The Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC) is expected to announce its decision on interest rates on February 8. Several developments have unfolded in recent weeks that could shape the verdict.

Firstly, India's retail inflation surged in November, reaching a three-month peak of 5.55%, per data released by the National Statistics Office (NSO) on December 12. This marked an increase from October's 4.87% and a slight decrease from the 5.88% recorded in November of the previous year.

Secondly, the Centre lowered its fiscal deficit target for the financial year 2024-25 (FY25) to 5.1% of the gross domestic product (GDP) reiterating its commitment to stay on the fiscal consolidation path to achieve 4.5% deficit by FY26.

Thirdly, after maintaining tight liquidity measures, the RBI injected ₹2.5 lakh crore into banks through a 15-Day repo operation on January 25, leading to the first dip in the inter-bank call rates to 6.5% from 6.75% in five months. A decline in the inter-bank call rate, a key indicator of short-term borrowing costs,  suggests the RBI is now more comfortable with the prevailing economic conditions and no longer perceives inflation as a major concern.

The drop in the overnight borrowing rate is causing people to think that the RBI might start to focus more on boosting the economy. Many believe the RBI could adopt a softer policy approach.

However, Santanu Sengupta, Chief India Economist at Goldman Sachs, remains cautious about expecting an immediate change in the RBI's stance. Sengupta predicts that the MPC will likely maintain current policy rates. in its December policy, the MPC left repo rate unchanged at 6.5%. 

Sengupta expects headline inflation to hover around 5-5.3% in the first quarter. RBI's tolerance band for inflation is between 2% to 6%.

“In our view, the change in (policy) stance and liquidity almost go hand in hand. There is no point of a change in stance without changing liquidity in the system for the overnight rates to fall to repo or below. So, when the RBI gets into an easing mode, that is when they can let the liquidity be in surplus, let the overnight rates drop to repo or below...,” he said.

Abhishek Upadhyay, Senior Economist at ICICI Securities PD, is also uncertain about a change in stance. Upadhyay suggests that even if the stance remains unchanged in this meeting, the RBI could provide a balanced commentary hinting at potential shifts in the April meeting.

Pranjul Bhandari, Chief India Economist at HSBC is inclined towards the likelihood of a dovish policy stance. “In the next couple of quarters, as fiscal takes a slight step back, my sense is that monetary condition is likely to take a step forward,” she said.

She expects some rate cut by RBI towards the second half of the calendar year 2024.

According to Ashhish Vaidya, MD & Head of Treasury & Markets of DBS Bank India, inflation continues to remain the top priority for RBI.