Indranil Pan, Chief Economist at YES Bank, has made a prediction that the Reserve Bank of India (RBI) will refrain from implementing any further rate hikes throughout the Fiscal Year 2024.
Pan's analysis, shared in an article on Money Control, highlights the RBI's cautious approach to monetary policy, which takes into account the evolving landscape of domestic growth and inflation.
According to Pan, the risks on the horizon appear to be either stabilizing or becoming more manageable, and there is now greater certainty regarding economic outcomes resulting from the policy settings. As expected, the RBI has kept the policy repo rate unchanged and maintained an unaltered stance on monetary policy, emphasizing the need to gradually withdraw accommodation.
Continuing from the April policy statement, the recent commentary reflects a positive assessment of the economic growth outlook. The growth projections for FY2024 remain unchanged at 6.5 percent, surpassing the market consensus. This optimistic figure stands even after economists revised their growth forecasts upward for FY2024, considering a significantly stronger-than-anticipated performance in Q4FY23.
Furthermore, the RBI's projected GDP growth exceeds that of certain multilateral agencies. The World Bank now forecasts FY2024 GDP growth at 6.3 percent, while the IMF expects it to reach 5.9 percent. Notably, India's growth is primarily driven by domestic factors. Although exports are anticipated to underperform in FY2024 due to a global economic slowdown, the substantial decrease in imports will alleviate the negative impact of net trade on GDP growth.
With the expectation of a stable growth trajectory, the RBI's primary focus is to anchor inflation expectations and bring inflation sustainably closer to the target rate of 4 percent. This slightly hawkish tone in the policy aims to align market expectations with monetary policy objectives. It is noteworthy because the market may have been anticipating a change in stance from "removal of accommodation" to "neutral." This anticipation is reflected in the decline of domestic 10-year G-sec yields to 7 percent, while the 3-month T-bill trades at 6.74 percent, indicating a narrow tenor premium of only 25 basis points.
Moving forward, the RBI will closely monitor the trajectory of inflation. The RBI's inflation expectations for Q1, Q2, Q3 and Q4 of FY2024 stand at 4.6 percent, 5.2 percent, 5.4 percent and 5.2 percent, respectively. This indicates that even with the assumption of normal monsoons, inflation is likely to rise to higher levels.
Adding to the potential challenges is the change in the Australian Meteorological Bureau's ENSO outlook to an "alert" status, suggesting a 70 percent chance of El Niño formation, which could disrupt the southwest monsoons in India. Although the Indian Meteorological Department has projected a normal monsoon with 96 percent of the Long Period Average, this figure is at the lower end of the scale. According to Money Control, any significant deviations in the timing and distribution of the monsoons could have implications for food inflation and warrant close monitoring.
The RBI emphasizes that, despite the expected decline in inflation, the focus of monetary policy remains on achieving the 4 percent target. Initially, the RBI's priority during the crisis period was to bring inflation within the tolerance zone, and once achieved, the RBI was content to operate within the tolerance band for a period. However, with a gradual improvement in economic conditions and increased certainty, the RBI will once again focus on durably bringing the inflation rate to the 4 percent level. However, achieving this target in FY2024 seems challenging, as indicated by the RBI's own projections.
The RBI Governor implied that achieving the 4 percent target will surely not be easy.
"What does all this analysis mean? The last leg of the journey is the toughest," the RBI Governor said.
"Immediate risks are the southwest monsoons, but longer-term risks remain in the form of geopolitical worries (the implication is for commodity and oil prices), deglobalization (implications for lower global trade volumes), global ageing population (structural inflation risks for the globe as current consumption increases with a rise in dependency ratio)," the RBI Governor said.
Therefore, the Governor's statement during the April meeting, emphasizing a "pause and not a pivot," remains valid, indicating that the possibility of an early rate cut, which some market participants may have considered, is now unlikely. Considering the inflation trajectory, it is now our belief that the RBI will likely maintain an extended pause throughout FY2024.
