According to economists at the State Bank of India (SBI), the Reserve Bank of India (RBI) is unlikely to lower the benchmark repo rate of 6.5 percent before the second quarter of fiscal year 25. The economists evaluated four repo rate scenarios.
They observed in the first scenario that if the Monetary Policy Committee (MPC) simply evaluated domestic Consumer Price Index (CPI) headline inflation statistics when deciding on the repo rate. In that situation, the current rate would be 5.93%. In the second scenario, if the MPC had just considered Fed rate hikes when deciding on the repo rate, the current rate would be 6.55 percent.
According to the third scenario, if the MPC had considered both domestic CPI headline inflation and Fed rate hikes while deciding on the repo rate, the present rate would be 6.53 percent, and according to the final scenario. If the MPC had taken into account domestic CPI headline inflation, CPI core inflation, and Fed rate hikes while deciding on the repo rate, the current rate would be 6.64 percent.
Based on all of the scenarios, the economists concluded that "the RBI may maintain the repo rate unchanged at 6.5 percent, despite the fact that CPI control requires a lower repo rate, but taking all variables into account, this is the period of status quo...As a result, the first rate cut will not occur until Q2'FY25 (as of today)."
The central bank is expected to maintain its position of 'removal of accommodation' and the repo rate at 6.50 percent in the next policy. The status quo is likely to be maintained, with the CPI forecast to be around 5.4-5.5 percent by March 2023, however inflation in November and December could exceed 6%. "Domestically, we believe at 6.50 per cent, we are in for a prolonged pause, no rate reversal cycle till June '24 stance," stated the Securities and Exchange Board in a report.
"We believe the stance should continue to be withdrawal of accommodation as inflation is unlikely to tread below 5 per cent in rest of FY24; as amidst the structural change in liquidity is making its forecasting difficult, it should be looked at with a completely different prism," the statement said. The central bank maintained the benchmark repo rate at 6.5 percent in October 2023. The RBI raised interest rates by 250 basis points from May 2022 to October 2023.
According to the report, the country's growth is anticipated to remain resilient, with dangers primarily emanating from sources outside of India. Higher oil prices are driving up inflation, while tighter global financial conditions are weighing on currency inflation and GDP dynamics.
Overall credit of All Scheduled Commercial Banks (ASCBs) increased by 20.6 percent year on year (Y-o-Y) as of November 17, 2023, up from 16.6 percent the previous year. At the same period, housing/commercial real estate increased by more than 35% year on year, while aviation increased by 67% year on year. Credit to the NBFC sector increased by 22% year on year.
"Overall, credit in the industry increased by 6%." Chemicals, metals, textiles, glass, and food processing, on the other hand, had double-digit increases. "In terms of infrastructure, roads grew by 9%, while telecommunications and railways grew by 7% each," the survey noted.
On the agricultural front, the wheat sowing shortfall shrank to 5% for the week ending November 24. However, the seeding of major wheat, pulses, and some oilseeds has been delayed this year due to the late harvest of kharif-grown paddy in a few states as a result of El Nino's negative effects.
The research also stated that CPI inflation is likely to be around 5.4-5.5 percent by March 2023, with November and December inflation potentially exceeding 6%. "With inflation expected to come down further, MPC is likely to maintain the status quo this fiscal," the study stated.
