APRIL POLICY SET FOR STATUS QUO AMID UNCERTAINTY
Astatus quo decision on rates and stance is a clear given in the Reserve Bank of India’s upcoming Monetary Policy Committee’s April 2024 policy meet. Global environment remains unsurprisingly uncertain, as most central banks continue to shy away from providing clear guidance and asserting their data-dependent, wait-and-watch approach.
To be fair, the world is no more as stable as it used to be in the pre-pandemic era, as persistent geopolitical tensions, erratic weather conditions, and surprisingly resilient demand continue to keep the central banks on tenterhooks.
While the US Federal Reserve has been dismissing any scope for early monetary easing, the recent Federal Open Market Committee (FOMC)’s decision can best be described as a reluctanthawkish one. Markets for now, appear to be drawing comfort from the continued projection of 75 basis points rate cuts in 2024 by the FOMC. However, the nuanced shift in tone and projections by the Fed (higher gross domestic product (GDP), core inflation and longer run policy rate) seems to be telling a slightly different story.
Of the 19 members, nine members expect two rate cuts or fewer (compared with seven members in the December FOMC)— nearly halfway the number needed towards causing a swing in decision.
Any further data signalling stickiness in inflation or persistence of a robust labour market poses material risk for rates staying on hold for longer—a risk which is increasingly becoming a reality, and something for which global markets may not be prepared just yet.
On the domestic front, meanwhile, the inflation trajectory seems to be trending lower in line with expectations. However, the food-led upside risks to inflation remain. The recent surge in crude oil prices would further make the MPC members wary, and may continue to keep their focus on the last leg of disinflationary trends intact.
The robust domestic growth further provides room for the MPC to hold on to the restrictive policy stance, unless confident on the durability of disinflation.
Having said that, RBI has allowed a gradual easing in financial conditions over the last five to six weeks. Recall, that the weighted average call rate (WACR) had persisted 20–30 basis points higher than the repo rate between mid-September 2023 and January 2024, deviating from the monetary policy framework requirement (WACR being closer to the repo rate).
RBI allowed the tightness to persist without providing much liquidity support. However, since February 2024, RBI has frequently been fine-tuning liquidity operations and, hence, has reversed the stealth tightness of nearly 25bps.
Of course, the liquidity conditions have eased since then, amid aggressive government spending and foreign exchange (FX) intervention, but RBI’s regular use of variable rate repo (VRR) and variable reverse repo rate (VRRR) to balance the downside and upside to overnight rates has comforted the markets.
While RBI in its February policy explicitly delinked the liquidity stance from the policy stance, we believe the central bank will continue to manage the two suitably to ensure a smooth monetary policy transmission.
The recent fine-tuning of liquidity operations by RBI to align overnight rates closer to the repo rate is a soft signal for the same, allowing the markets to discount the timing of change to the current stance of “withdrawal of accommodation”.
Although, the frequent reference to stance being interpreted in terms of policy rates (both in the minutes and the post-February policy press conference) does provide more vagueness in terms of timing of the policy stance, we still see scope for change of stance to neutral in the June-August policy.
However, repo rate cuts may still have to wait till later in FY25 (or even longer), given the uncertain domestic food inflation trajectory, uptick in crude oil prices and the risk of delayed global monetary easing.
Overall, while the April policy is likely to maintain status quo, the tone of the statement will need to be carefully watched out given the uncertain global backdrop.
Moreover, it will be interesting to see any further split in the voting patterns as members dissect the evolving macroeconomic conditions amid elevated ex-ante real rates.
The views and opinion expressed in the column are personal and do not necessarily reflect the opinion of the organisation or the Kotak Group.
The tone of the MPC statement will need to be watched, given the uncertain global backdrop