Rejigged monetary policy committee may not alter status quo

NEW DELHI: Government is yet to appoint new external members of RBI’s monetary policy committee, which has left forecasters hesitant to make predictions about the next MPC action on Oct 9. However, economists believe that regardless of the committee members, there will be no rate cuts in Oct.

The good news for banks is the improved liquidity in the money markets, which has led to the yield on the 10-year govt bond dropping to around 6.75%. Nomura has forecasted that this yield will further decrease to 6.5% by the year end. This has alleviated pressure on deposit rates and subsequently on loan pricing.

Tanvee Jain, economist at UBS, expects RBI to begin rate cuts in Dec, depending on India’s growth-inflation dynamics. “Real interest rates have moved higher, as inflation has begun to moderate, raising questions over whether this is holding back a much-needed capex cycle recovery. Given the domestic inflation outlook is improving (likely to be 0.3% lower than RBI’s forecast of 4.5% for FY25) and the global monetary easing cycle has begun, we now expect MPC to lower repo rates by 75bps in this cycle.”

Radhika Rao, economist at DBS, said the US Fed’s aggressive 50bps cut in Sept shows a global shift. “The MPC is cognizant that the July-Aug CPI moderation was due to an exceptionally favourable base effect, with stickiness in food inflation offsetting a deeper pullback in the headline print. While Oct’s meet might result in a pause, we expect the accompanying language to accommodate a pivot later in the year.”

Global easing has lowered 10-year govt bond yi elds to a two-and-a-half-year low, but RBI is focusing on food prices.
Madhavi Arora, lead economist at Emkay Global, said, “Food prices, especially vegetables, have moved higher after heavy rainfall and flooding that disrupted supply. The impact of higher customs duty on imported edible oils is also reflected in retail prices.” Although many anticipated the government to announce the new MPC members’ names this week, the announcement has been delayed. The upcoming MPC meeting is scheduled between Oct 7 and 9.

During the previous meeting, two external members voted for a cut in the repo rate from 6.5% to 6.25%, while the third external member voted to keep the rate unchanged. The three RBI members, including the governor, voted against a rate cut, citing persistent food inflation, potential spillover effects, and the need to ensure durable disinflation amidst steady growth.