RBI rate cut: The ongoing monetary policy committee (MPC) meeting of the Reserve Bank of India (RBI) marks the first meeting of this fiscal year. The meeting is set against a backdrop of stronger-than-expected economic performance despite pressures in specific segments of the economy. Robust economic performance is highlighted by the fact that FY24 growth is now seen at 7.6 per cent, as per the advanced estimates of MOSPI, led by strong growth in the 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, the Federal Open Market Committee (FOMC) met in March to determine the trajectory of rates going forward and decided to keep the interest rate unchanged for 5th time in a row but one thing that FOMC made clear was that interest rates are not going to come down anytime soon. Going forward, Chair of US Fed Jerome Powell while addressing a gathering at Federal Bank of San Fransisco said, “The group tasked with determining the federal funds rate (FFR), does not feel any temporal pressure to reduce rates rapidly.” However, the Fed has signalled three rate cuts in 2024.

According to the SBI Ecowrap report, between 2008 to Mar 2024 all major emerging economies rates such as Indonesia, India, Malaysia, Saudi Arabia, and Thailand are either 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 the interplay of these rates across countries….RBI might cut rates only in Q3FY25,” the report stated. In addition, Reuter’s poll also added that RBI will keep the rate steady in this MPC as well. All 56 economists in the March 15-22 Reuters poll expected the RBI to hold the repo rate at 6.50 per cent after its April 3-5 meeting.

“RBI is expected to announce the first monetary policy for FY25 and the rates are likely to remain unchanged with the possibility of no change in the stance too. 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. In the last policy (Feb’24), 5 out of 6 members voted to keep the policy rates unchanged even as 1 member voted to reduce the repo rate by 25bps,” Jahanavi Prabhakar, Economist, Bank of Baroda added.  

Inflation pressures 

According to economists and analysts, inflation has eased but food prices remain a concern, headline inflation has eased significantly from 5.7 per cent in December to 5.1 per cent in January and February. “The fall in overall inflationary pressures over the past couple of months has been broad-based, with core inflation consistently trending downward, remaining below the 4 per cent threshold for three consecutive months. However, the food and beverages 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 Economist of CareEdge said in a report. 

According to the 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 ahead evolving food prices will determine domestic inflation. CPI inflation is expected to remain slightly above 5.0 per cent in the 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 the whole FY25, CPI inflation is likely to average 4.5 per cent,” the report added. 

According to the report, the sustained inflationary trend in nonperishable food categories, such as pulses and spices, raises concerns about the potential broadening of price pressures due to their inherent stickiness. However, it is worth noting that supply-side interventions have played a pivotal role in tempering prices, particularly in cereals. 

Strong Growth

As shown by the PMIs for manufacturing and services, the outlook in the organised sector remained in the 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 the 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 notable uptick in two-wheeler and passenger vehicle sales. As per CMIE's data, the all-India unemployment rate averaged 7.4 per cent in Jan-Feb 2024, lower than 9 per cent in Q3 FY24. The improvement in the employment conditions in the first two months of 2024 was visible in both urban and rural areas, where it averaged 8.7 per cent and 6.8 per cent, respectively, lower than the Q3 FY24 average of 9.3 per cent and 8.8 per cent. The improvement in rural labour market conditions was also underscored by four months of consecutive contraction in MNREGA job demand (persons). 

External Situation

The 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 non-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 the business services component. Amid strong trade data, we expect CAD forecasts to lower to around 0.7 per cent of GDP for FY24.