RBI rate action and stance change unlikely before December 2024: SBI Ecowrap

Hours after the Reserve Bank of India (RBI) kept the benchmark interest rate unchanged at 6.50%, the SBI economic research department said the central bank may keep the rate and stance unchanged till December 2024. 

“The RBI MPC delivered the rate-based outcomes along expected lines (and, with expected majority of 4-2) while the tone and pitch signalled the near optimal factoring of clouds gathering on multiple fronts despite domestic macros continuing a robust forward march; an intense monsoon locally with uneven spatial distribution that can dismantle the maths behind food price led inflation and its interlinkage with households expectations, challenging outlook on merchandise trade as the largest economy signals a cooling off phase, smooth transmission of yields and premiums across various terms and products against ever-changing landscape of liquidity. The need for synchronising stance, facilitating actual rate pivot thus assume greater significance in uber uncertain times,” the SBI Ecowrap report said.

The central bank decided for the ninth consecutive time to maintain the benchmark repo rate at 6.5% and maintain the policy stance of ‘withdrawal of accommodation’. Industry experts have stated that this decision allows the central bank the flexibility to concentrate on managing inflation in order to promote a robust and enduring economic expansion.

“The emphasis of the governor, even when the fragmented MPC pledged support to keep the policy rates unchanged ninth times in a row in line with broader market expectations, remained on the skewed probability of downside risks gaining currency, dismantling the present equilibrium where risks appear evenly balanced and growth remains resilient, factoring in the choppiness prevailing in global markets,” the report added.

It further noted many experts are increasingly urging the Federal Reserve to make a significant shift in its monetary policy. The calls are for either an unscheduled interest rate cut or reducing the Federal Funds rate by up to 50 basis points during the upcoming September meeting. This push is fueled by the looming threat of a recession, indicated by the Sahm Rule as a leading factor this time. 

The US job market, with disparities between full-time and part-time employment, along with rising unemployment rates among white and Asian demographics, reflects a slowing economy. This situation not only impacts various racial groups differently but also has global repercussions through interconnected markets. The constrained fiscal options and rising economic uncertainties are prompting investors to divest from risky assets, potentially triggering a self-perpetuating downward spiral of market sell-offs.

Talking about inflation, the SBI report said RBI retained its inflation projection for FY25 at 4.5% with Q2 at 4.4%, Q3 at 4.7%, and Q4 at 4.3%. The outlook for inflation will largely be shaped by food inflation trajectory and base effect. Further, volatility in crude oil prices on demand concerns and geopolitical tensions may pose upside risks to inflation.

In just one year the contribution of food inflation in overall CPI inflation has increased from merely 36% (May’23) to 76% in Jun’24. Food inflation is not only increasing it is quite stubborn also. While high food price momentum is likely to have continued in July, a degree of relief is expected from the pick-up in the south-west monsoon and healthy progress in sowing.

RBI retained its real GDP growth projection for FY25 at 7.2% (Q1: 7.1%, Q2: 7.2%, Q3: 7.3%, and Q4: 7.2%) with risks evenly balanced. The expectation of normal monsoon and healthy kharif sowing will support improving rural demand. This along-with sustained momentum in manufacturing and services activity may enable a revival in private consumption. However, the bright outlook may be clouded with geopolitical tensions, volatility in international commodity prices and geo-economic fragmentation.