Economy: RBI MPC: Status quo, expect cuts before long

10 Apr 2024 , 12:08 PM

The RBI’s MPC maintained status quo on rates and stance, as expected. The FY25 real GDP growth and inflation estimates were retained at 7% and 4.5%, respectively. Globally, economic signals remain mixed, with growth challenges in major economies like the UK, EU, Japan, and China, while US inflation cool off and rate cut expectations get delayed moreover complicated by geopolitics (crude spike), potentially dampening India’s growth a bit. While analysts of IIFL Securities continue to see RBI’s growth assessment as optimistic, the outlook is stable with lower bond yields, supported by expected sovereign bond inflows (implies strong INR, in line with US$ GDP targets) and fiscal consolidation measures. Analysts of IIFL Securities replace BAF with Chola Investment in their large-cap picks, along with removing Trent and Mankind after their recent OP, and retain their overall constructive stance. Geo-politics causing a sharp crude spike is a risk.

Status quo on rates and stance:

RBI MPC continued its pause on repo rate at 6.5% (5:1 majority), as expected. Accordingly, SDF stands unchanged at 6.25% and MSF rate at 6.75%. Further, RBI has maintained its FY25 real GDP growth and inflation estimate at 7% and 4.5% respectively. MPC conveyed that it is free to focus on inflation entirely to bring it down durably to 4%, as growth was so strong.

FY25 growth estimate optimistic:

In India, while growth looks strong, on a “feel” basis with FY24 nominal GDP growth at 9.1% (NSO) and inflation seemingly between 3-4% (WPI / CPI avg), real GDP looks more like 6%, and future downward revisions to FY24 GDP growth can’t be ruled out, as seen in the past. Add to this iffy global outlook and fiscal consolidation, and RBI’s growth estimate looks optimistic. India’s core CPI (ex-Food, Energy, Fuel & Gold) has consistently been below 4% and trending down in the past five to six months, while food CPI remains volatile and high. Low reservoir levels (near 10yr avg. level, but lower than those seen in the past three to four years) and intense heat-wave expectations by IMD pose further risk to food prices; but on the other hand, good Rabi crop, predictions of El Nino conditions weakening and normal South-West monsoon could provide a relief. On balance, analysts of IIFL Securities feel RBI’s FY25 inflation expectation of 4.5% seems fair.

Global macro and commodities outlook iffy:

US Mfg PMI has staged a turnaround in the last six months, after months of contraction/stagnation. But real policy rates are very restrictive (more than 2ppt), unemployment has crept up to 3.9%, quits rate have trended lower back to pre-Covid levels — indicating a softening job market. Rising credit card debt (>$1trn) and delinquency rates above the pre-Covid levels are worries. Other major economies like the UK, EU, Japan, and China anticipate continued growth challenges, with China’s overproduction pressuring global prices (commentaries from chemicals, metals and EV cos) and a host of countries initiating antidumping investigations for the items from solar modules to chemicals to steel.

Commodities (incl. oil) have seen some recent flare-up, but analysts of IIFL Securities don’t expect a runaway increase as they face headwinds from weak global growth and US “higher for longer”. Thus, analysts of IIFL Securities expect inflation to stay broadly under control. US CPI, adjusted to real-time shelter indices, remains around 2% on a SAAR basis. Recent inflation data and commentaries from various Fed governors have lowered market expectations on rate cuts and timings; but analysts of IIFL Securities have seen that these market expectations keep oscillating (from more than six cuts a couple of months ago to three cuts now) within a short time frame and cannot be held as sacrosanct. On balance, though timing remains uncertain, analysts of IIFL Securities continue to expect global monetary easing sooner rather than later. They expect even RBI to ease rates as global easing starts or growth undershoots expectations; but by a smaller amount than AEs, as it was on the way up.

Expect stable INR and lower yields:

Given the above backdrop, coupled with expected large inflows from sovereign bond inclusion in FY25 as well as fiscal consolidation, as announced in the FY25 Budget, it makes a strong case for stable rupee (if not stronger as RBI has already shored up its FX reserves back to an all-time high of $645bn, so RBI’s intervention can’t be ruled out) and lower bond yields. Indian govt’s preference also seems to be a stronger rupee, given a dollar GDP target of $5trn economy (now by 2027).