The rate-cut cycle of the Reserve Bank of India (RBI) has likely ended, and the central bank will likely maintain a long pause along with the neutral policy stance, according to economists of YES Bank.
“Unless there is any serious crumbling of the growth dynamics, we think the current interest rate cut cycle of the RBI is over, and the RBI will likely maintain a long pause, along with the stance being kept at ‘neutral’. Actions to keep liquidity comfortable and anchor the operative rate to the repo rate are expected to continue,” say YES Bank economists Indranil Pan and Khushi Vakharia in a report.
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on December 5 cut the repo rate by 25 basis points to 5.25%, while maintaining a neutral policy stance.
Meanwhile, the minutes of the last meeting of the RBI MPC, released on Friday, December 19, showed that the central bank decided to cut rates due to benign inflation and emerging signs of weakness.
“The minutes of the December meeting highlight RBI’s commitment to maintaining the growth momentum. While the growth surprised on the upside in the first half, it is expected to soften in the second half,” YES Bank economists stated.
“MPC members noted that inflation remains below the lower bound of FIT ( flexible inflation targeting) and thus necessitates counter-cyclical action from the central bank.”
Inflation is likely to rise
The Consumer Price Index (CPI), or the retail inflation, stood at 0.71% in November, up from 0.25% in October.
Under the flexible inflation targeting framework, the MPC targets retail inflation at 4% with a tolerance band of +/-2%.
YES Bank economists pointed out that the next meeting of the MPC is scheduled post-Budget alongside a new CPI series with a change in base and restructuring in the weight diagrams.
“The next policy announcement will come close to the Ministry’s publication of the new base year CPI, along with its change in the weighting diagram. Household Expenditure Survey of 2022-23 indicates a lowering of the food weight in CPI and a higher weight for non-food items,” said YES Bank.
“The new CPI will likely lead to lower food weightage, and thus the comfort derived from low food prices could be limited. While we expect MPC to maintain the neutral stance, we do not expect RBI to cut rates further unless growth falters significantly,” YES Bank said.
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