Published 14:19 IST, April 4th 2024
Will RBI keep the rates steady in the first MPC of FY25?
The repo rate was last revised in Feb’23 when it was hiked by 25bps, bringing the repo rate to the 6.5 per cent mark.
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RBI rate cut: The ongoing monetary policy committee (MPC) meeting of Reserve Bank of India (RBI) marks first meeting of this fiscal year. meeting is set against a backdrop of stronger-than-expected ecomic performance despite pressures in specific segments of ecomy. Robust ecomic performance is highlighted by fact that FY24 growth is w seen at 7.6 per cent, as per vanced estimates of MOSPI, led by strong growth in investment demand. Gross Fixed Capital Formation (GFCF), which is a proxy for investment growth, is projected to expand by a healthy rate of 10.2 per cent in FY24.
Similarly, Federal Open Market Committee (FOMC) met in March to determine trajectory of rates going forward and decided to keep interest rate unchanged for 5th time in a row but one thing that FOMC me clear was that interest rates are t going to come down anytime soon. Going forward, Chair of US Fed Jerome Powell while dressing a garing at Federal Bank of San Fransisco said, “ group tasked with determining federal funds rate (FFR), does t feel any temporal pressure to reduce rates rapidly.” However, Fed has signalled three rate cuts in 2024.
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According to SBI Ecowrap report, between 2008 to Mar 2024 all major emerging ecomies rates such as Indonesia, India, Malaysia, Saudi Arabia, and Thailand are eir being predicted by past movements of US rates or UK rates, signifying Granger causality relationship. “Lag of 2 months is found to be an optimal lag of operation in interplay of se rates across countries….RBI might cut rates only in Q3FY25,” report stated. In dition, Reuter’s poll also ded that RBI will keep rate stey in this MPC as well. All 56 ecomists in March 15-22 Reuters poll expected RBI to hold repo rate at 6.50 per cent after its April 3-5 meeting.
“RBI is expected to anunce first monetary policy for FY25 and rates are likely to remain unchanged with possibility of change in stance too. repo rate was last revised in Feb’23 when it was hiked by 25bps, bringing repo rate to 6.5 per cent mark. In last policy (Feb’24), 5 out of 6 members voted to keep policy rates unchanged even as 1 member voted to reduce repo rate by 25bps,” Jahanavi Prabhakar, Ecomist, Bank of Baroda ded.
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Inflation pressures
According to ecomists and analysts, inflation has eased but food prices remain a concern, heline inflation has eased significantly from 5.7 per cent in December to 5.1 per cent in January and February. “ fall in overall inflationary pressures over past couple of months has been bro-based, with core inflation consistently trending downward, remaining below 4 per cent threshold for three consecutive months. However, food and bevers inflation remains elevated, with a 7.8 per cent increase in February, led by price pressures in vegetables (30.3 per cent), pulses (18.9 per cent), and spices (13.5 per cent),” Rajni Sinha, Chief Ecomist of CareEdge said in a report.
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According to SBI Ecowrap report, with moderate fuel prices, inflation is currently being driven by food price dynamics. CPI inflation is mostly driven by good inflation. Looking ahe evolving food prices will determine domestic inflation. CPI inflation is expected to remain slightly above 5.0 per cent in remaining month of FY24. Core CPI declined to 3.37 per cent - a 52-month low. “Inflation is expected to decline till Jul’24 but increase after that to reach a peak of 5.4 per cent in Sep’24, followed by a deceleration. For whole FY25, CPI inflation is likely to aver 4.5 per cent,” report ded.
According to report, sustained inflationary trend in nperishable food categories, such as pulses and spices, raises concerns about potential broening of price pressures due to ir inherent stickiness. However, it is worth ting that supply-side interventions have played a pivotal role in tempering prices, particularly in cereals.
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Strong Growth
As shown by PMIs for manufacturing and services, outlook in organised sector remained in expansionary zone. Industrial production grew by 5.9 per cent during Apr-Jan FY24 compared to 5.6 per cent in last year's corresponding period. Infrastructure and construction goods output supported overall IIP with an expansion of 10 per cent during Apr-Jan FY24 compared to 8.5 per cent last year. E-way bill collections rose 18.9 per cent YoY in February, up from 13.2 per cent YoY in December. In February 2024, automobile sales surged by 24.3 per cent year-on-year (YoY), supported by a table uptick in two-wheeler and passenger vehicle sales. As per CMIE's data, all-India unemployment rate averd 7.4 per cent in Jan-Feb 2024, lower than 9 per cent in Q3 FY24. improvement in employment conditions in first two months of 2024 was visible in both urban and rural areas, where it averd 8.7 per cent and 6.8 per cent, respectively, lower than Q3 FY24 aver of 9.3 per cent and 8.8 per cent. improvement in rural labour market conditions was also underscored by four months of consecutive contraction in MNREGA job demand (persons).
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External Situation
external environment remains favourable, with a narrowing current account deficit and robust foreign exchange reserves. Overall merchandise exports rose to an 11-month high of $41.4 bn in February. This improvement was supported by both petroleum and n-petroleum exports, which increased by 5.1 per cent and 13.7 per cent YoY, respectively. Monthly service exports increased by a strong 6.8 per cent YoY during April- February FY24. Services exports continued to be led by software services, followed by business services component. Amid strong tre data, we expect C forecasts to lower to around 0.7 per cent of GDP for FY24.
13:45 IST, April 3rd 2024