The six-member Monetary Policy Committee (MPC) is likely to vote unanimously to keep the policy repo rate unchanged at 6.50 per cent in the backdrop of retail inflation for April 2023 easing to a 19-month low and FY23 GDP growth accelerating more than the earlier estimates.

While majority of the members could vote for the “to remain focussed on withdrawal of accommodation” stance, a couple of members may prefer shifting of gears to the “neutral” stance in the run-up to a likely rate cut (or two) that could happen in the second half of FY24.

‘A pause, not pivot’

In his April 6th statement, announcing the MPC’s decision to keep the repo rate steady, RBI Governor Shaktikanta Das characterised the monetary policy in just one line: “It is a pause, not a pivot.” 

While underscoring that there has been an effective rate increase of 290 basis points over the last one year, including the SDF (standing deposit facility) 40 basis points rate increase, Das, who is the ex-officio Chairperson of MPC, said: “It is, therefore, now necessary to assess the cumulative impact of our actions taken so far.”

The Governor then also observed that the MPC remains watchful and will not hesitate to take further action in its future meetings as may be necessary. So, the job is not yet finished.

Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, expects the MPC to keep the repo rate unchanged at 6.5 per cent at the June 8 meeting, considering the moderating near-term inflation trajectory and still-resilient domestic economic activity.

“The MPC is likely to highlight the need to evaluate the impact of existing rate hikes on inflation and aggregate demand as a justification to keep rates unchanged.

“Possible risks to headline inflation, including the likely occurrence of an El Nino this year and some stickiness in core inflation from resilient economic growth, could imply the RBI will remain on pause in the near term,” he said.

Bajoria expects the MPC to revise its near-term inflation forecasts lower, while keeping its growth projections unchanged.

“Considering the RBI’s hawkish rhetoric and cautious stance on inflation, we do not expect rate cuts to begin any time soon.

“Amid a gradual decline in inflation and some moderation in growth arising from external headwinds, we expect the RBI to stay on hold through FY2023-24, he said.

Moderating inflation

Bank of Baroda’s economic research department (ERD) expects MPC to remain on pause in the near-term, with inflation seen moderating in FY24.

“We do not expect any rate action in the first half of FY24. If inflation trajectory evolves as expected, we may see rate cuts in the second half. We expect a cumulative 50 basis points reduction in repo rate,” the Bank’s ERD team said.

Axis Bank, in a report, said India CPI inflation will average around 5 per cent levels in FY24 on the back of strong base effect.

The Bank’s economic research team observed that strong US labour markets data along with resilient demand for industrial & consumer goods is likely to keep rates elevated for long.

“This will constrain the MPC to cut rates anytime soon given impossible trinity (the simultaneous pursuit of fixed exchange rate, free capital flows and independent monetary policy),” the bank said.

Churchil Bhatt, Executive Vice-President & Debt Fund Manager, Kotak Mahindra Life Insurance, said, “The market doesn’t seem to be anticipating an immediate rate cut. The best case for the June policy would be a softer ‘stance’ by the MPC. “

He underscored that the current policy stance of ‘withdrawal of accommodation’ has already run its course, with pandemic-era policy accommodation behind us.

“It’s only a matter of time before the MPC moves to a ‘neutral’ stance.

“In the absence of a major global risk event, we may be in for a prolonged policy pause. In June, MPC is likely to maintain a status quo on rates,” Bhatt said.