News

Published: June 7, 2024
Updated: June 7, 2024

RBI Monetary Policy: Key Indicators and Market Expectations Post-Election

As the Reserve Bank of India (RBI) prepares to unveil its second monetary policy for the financial year 2024-25 today (June 7), economists and market watchers are keenly observing the implications. This announcement comes in the wake of the recent Lok Sabha elections, where the BJP-led NDA secured a majority, surpassing the crucial 272-seat mark.

Economic Landscape:

1. Macroeconomic Indicators

India's macroeconomic indicators remain robust, with notable GDP growth and controlled inflation levels. The RBI's rate-setting panel will assess global economic headwinds and climate-related shocks impacting key economic variables such as GDP growth and food prices.

2. Expectations for Repo Rate

Most analysts anticipate that the RBI will maintain its key repo rate at 6.50% following the June 5-7 Monetary Policy Committee (MPC) meeting. This expectation aligns with the RBI's current stance on withdrawing accommodation. However, recent weather anomalies, including heatwaves and escalating food prices, suggest that the MPC's focus will likely remain on curbing inflation despite the strong economic growth witnessed in FY24.

3. Inflation Concerns

The consumer price index (CPI)-based inflation eased to an 11-month low of 4.83% in April, approaching the RBI's target of 4%. Nonetheless, food inflation remains high at 8.7%. According to Vinod Nair, Head of Research at Geojit Financial Services, the RBI is expected to maintain its current policy stance until inflation is consistently within the target range of 4% ± 2%.

4. GDP Growth Insights

India's GDP growth for FY24 reached 8.2%, the fastest among major economies, surpassing both RBI and market estimates. This robust growth, coupled with moderate inflation, suggests that immediate rate cuts are unlikely. Sanjay Nayar, President of ASSOCHAM, emphasized that sustainable economic growth requires a balance between cyclical consumption-driven growth and investment-driven supply-side expansion.

5. Liquidity and Government Spending

The year-end government spending has significantly eased liquidity conditions, with cash balances initially low but subsequently building up to ₹5.2 trillion, including an RBI dividend of ₹2.11 trillion. Average system liquidity shifted from a surplus in April to a deficit in May, indicating tight conditions in the near term. ICICI Bank expects liquidity conditions to remain constrained, with the RBI likely using Variable Rate Repo (VRR) operations to manage overnight rates.

Future Rate Cut Projections

The timing of potential interest rate cuts in 2024 is a topic of debate among economists. While some, like Nuvama Wealth Management, foresee a shift from "withdrawal of accommodation" to a "neutral" stance, others, including SBI Research, predict the first rate cut in Q3FY25. ICICI Bank anticipates a policy stance change in October 2024, followed by a rate cut in December, provided inflation remains within the target range and global economic conditions are favorable.

The RBI's upcoming policy announcement will be crucial in shaping India's economic trajectory. While the central bank is expected to maintain its current stance, the focus will be on managing inflation and supporting sustainable growth. Market participants will closely watch the RBI's inflation and GDP forecasts for FY25, with the monsoon's impact and geopolitical developments playing pivotal roles in future policy decisions.