India Economy, Monetary Policy - On Track For A Rate Cut In April, As System Liquidity Tightens, Core Inflation Abates: ICICI Securities

ICICI Securities Report

There was no surprise in the Reserve Bank of India’s decision to persist with existing policy rates. Although its stance remains ‘withdrawal of accommodation’, the RBI governor also cautioned against the ‘risk of over-tightening’ - implicitly a more balanced stance.

With the banking system’s liquidity already stretched (at a loan-deposit ratio of 79.8% in November 2023), the RBI has had to inject liquidity almost daily for the past two months, after having had to drain liquidity for the previous 3.5 years.

The MPC warned about the risk of vegetable inflation; its forecast of 5.6% YoY headline inflation in Q3 FY24 implies a spike to 6% YoY Consumer Price Index inflation in Nov-Dec-23.

However, with core inflation likely to ease below 4% YoY by Dec-23, and cereals disinflation from Jan-24 onwards helped by an artificially high base, we continue to expect headline CPI inflation to abate to 4% YoY by March 2024 (several months before the RBI’s forecast of 4% inflation in Q2 FY25). Consequently, we expect a 25 basis points rate cut in April 2024.

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