New Delhi: Given the tone of the MPC statement and the expectation of growth buoyancy, there is a likelihood that any rate cut by the Reserve Bank of India will be significantly reduced over the next six months. It is expected that the short - term rates will continue to remain high in the near term and bank deposit rates are likely to show an increase by 25-50 basis points, given the continuing gap between credit and deposit growth.
Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research said that it was no surprise that RBI MPC decided to keep the status quo on the interest rates for the sixth consecutive time. However, RBI continued to sound hawkish as against the market expectations and has not provided any indication of the timing of the change in monetary stance from “withdrawal of accommodation.
RBI continues to remain fairly optimistic on the growth prospects of the Indian economy. They have significantly upgraded their growth prospects for the next fiscal to 7.0%, reflecting that there are minimal concerns on economic growth at this time. RBI’s assessment on global growth also appears to be positive vs last year and it also believes that central banks are unlikely to resort to a pivot within a short period.
Our outlook on the domestic growth prospects are moderate with a base forecast of 6.3% for FY25, given the visible weakness in the private consumption growth which is estimated at 4.4% in FY24 in the NSO estimates. On the inflation front, the base forecast for headline CPI in FY25 is set at 4.5% which in our opinion has significant upside risks if the growth really maintains such a high level of momentum and if there are even moderate risks in the monsoon behavior.
Chowdhury said “The governor highlighted the significance of the 'last mile of disinflation' and also indicated that the monetary transmission is still incomplete. Given such a background, the central bank will continue to prefer a tighter liquidity position. The liquidity has been in deficit since September 2023 and the system liquidity deficit has widened progressively. However, RBI hasn’t announced any specific steps to address the visible volatility in short term rates apart from indicating that the tools of 'VRRR/VRR' will be used to balance the liquidity position.”
On the financial stability front, the focus on higher disclosures and transparency on the “all in cost” of retail and MSME loans for banks and NBFCs is a step in the right direction. This may slow down the growth of processing fees in retail and MSME loans in the financial sector, experts said.
Dharmakirti Joshi, Chief Economist, CRISIL added that the liquidity management has been the preferred method to push up market interest rates and the MPC feels this is the way forward till consumer inflation is aligned to the RBI’s medium-term target of 4%.
Joshi said “While fiscal prudence has smoothened the path for monetary policy, the RBI is wary of cutting rates or changing stance too soon given inflation is not fully tamed yet.” Joshi believes given the tensions around the Red Sea — and its attendant impact — and given the trajectory of food prices an interest rate cut is unlikely in the April monetary policy review and would most probably come in June, if not later.
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