The rate-setting panel of the Reserve Bank of India (RBI) in its monetary policy statement on April 5 took stock of the prevailing interest rates and related aspects. While this is supposed to be only a routine assessment, the market and all stakeholders look at every such bi-monthly meeting from the perspective of changes in interest rates, as that affects life in some form or the other. For Friday’s meeting of the monetary policy committee (MPC), there was not much by way of expectations in rate changes.
RBI maintains status quo on rates, stance
It was a complete status quo meeting; no significant change was announced. Having said that, we discuss some of the key takeaways.
CPI or Consumer Price Index inflation projection for the current financial year, 2024-25, has been maintained at 4.5 percent, as in the previous policy review on February 8, 2024. This number is the average of the four quarters of the year. For the second quarter, July-September, inflation projection is 3.8 percent. This is significant. The target for CPI inflation for the central bank is 4 percent. The RBI’s tolerance band has been stated to be 2-6 percent, giving it a leeway of 2 percentage points. As long as inflation is within the 6 percent upper limit, it is considered under control. However, for the RBI to cut interest rates, inflation should be at or seen consistently near 4 percent.
Given that in the quarter July-September 2024 inflation is seen below the central target of 4 percent, it gives the RBI scope to initiate the policy rate easing cycle, something investors are awaiting.
Gross domestic product growth for 2024-25 has also been maintained at 7 percent, as in the previous policy review. In 2023-24, economic growth was a positive surprise, and since growth indicators remain robust, there is a possibility of a marginal upward revision of growth projection over the course of the current fiscal. However, since growth prospects are sanguine and inflation within control, the RBI can afford to take some time to reverse the interest rate cycle.
There were certain other announcements in the April 5 policy statement.
The RBI’s Retail Direct Gilt (RDG) Scheme enables individual investors to invest in government securities. The implication is, the market for G-Secs is institutional or wholesale, out of reach for common people. Through RDG, people can buy into G-Secs, albeit in small lots. The MPC on April 5 said a mobile application for the RDG portal is being developed, which would add another level of convenience for retail investors.
The facility of cash deposit at banks’ cash deposit machines, thus far accessible only through debit cards, will now be opened up to use through unified payments interface or UPI as well.
Repo rate cut on the cards later this year
There is widespread expectation that the RBI will reduce interest rates sometime over the course of the year. The only lookout for Friday’s review was for any hint on this. There is a stance that is followed by the MPC, and currently, it is “withdrawal of accommodation”. This was adopted in May 2022 when the RBI started hiking interest rates, in view of high inflation. Now that CPI inflation is within a tolerable band—5.09 percent in February 2024 and projected at 4.5 percent in 2024-25—there is a case for a change in stance from “withdrawal of accommodation” to “neutral”. This is expected to happen at the next review meeting on June 7.
The actual change in interest rates may have to wait till the August meeting. If things go as expected, by then, the US Federal Reserve would have started the interest rate reduction cycle at its meeting on June 12 and the European Central Bank at its meeting on June 6. India’s inflation is expected to ease to somewhere around 4 percent by then. Hence, on August 8, we may expect the RBI to reverse the interest rate policy, by 25 basis points to start with.
Lower interest rates a plus for corporates, individual borrowers
A cut in the RBI’s policy repo rate translates into lower interest rates overall, which means cheaper money, and is positive for the equity market as corporates can avail of lower-cost loans. For bonds, interest rates and prices move inversely, hence rates coming down is positive. As an individual, if you have availed of loans, you would prefer lower interest rates. Except depositors, all other stakeholders are looking forward to a policy rate easing cycle.
We look forward to a change in stance at the July 7 meeting from “withdrawal of accommodation” to “neutral”. That is the stepping stone for eventual rate reduction at a later meeting, either in August or October 2024.