RBI Monetary Policy Preview: Likely To Maintain Status Quo, Focus On Liquidity

India's Monetary Policy Committee is likely to maintain status quo on the Reserve Bank of India's key lending rate amid the continuing need to bring down inflation further even as economic activity remains resilient.

All the 41 economists polled by Bloomberg expect the MPC to hold the Reserve Bank of India's repo rate steady at 6.5% on Thursday.

"We maintain our view that the RBI MPC will keep the policy rate unchanged at the Feb. 8 policy meeting at 6.50%, sound optimistic on growth, recognise the sharp fiscal consolidation in the interim budget, and reiterate the commitment to the 4% headline inflation target, stated a research note by Goldman Sachs.

While the RBI is likely to keep policy settings unchanged, the tone is likely to be less hawkish, said Rahul Bajoria, chief economist at Barclays.

"We see a window for rate cuts opening in Q1 FY25," he said.  

The Consumer Price Index-based inflation was at 5.69% in December, as compared with 5.55% in November. It remained within the central bank's target range of 4% plus or minus 2%.

Food and beverage inflation rose to 8.7% in December, compared with 8.02% in November. Core inflation, excluding volatile food and fuel, eased further to 3.9% in December, compared with 4.12% in November, according to Bloomberg.

CPI inflation is expected to decline to 5.4% year-on-year in January from 5.7% in December owing to a contraction in vegetable prices (onions and tomatoes) and pulses, according to Goldman Sachs. Despite a sequential contraction in food prices in January, food inflation is expected to remain elevated at 7.9% year-on-year, while core inflation is expected to remain unchanged at 3.9%. 

Liquidity deficit has increased since the last policy in December.

While financial markets will be closely watching the Governor’s comments and the RBI’s actions on liquidity, liquidity will continue to be actively managed by the RBI consistent with the monetary policy stance of “withdrawal of accommodation”, said the note by Goldman Sachs.

With liquidity conditions remaining persistently tight keeping the overnight rates 25-30 basis points higher than repo rate warrants attention, said Suvodeep Rakshit, senior economist at Kotak Institutional Equities. With the stance still remaining unchanged, the scope for any structural/permanent measures by the RBI to ease liquidity remains limited, he said.

The frictional liquidity tightness should continue to be addressed through measures like variable rate reverse repo auctions with RBI’s reiterating their active presence in liquidity management, he added. 

The government has sharply reduced its FY25 budgeted gross borrowings to Rs 14.1 lakh crore, much lower than market expectations. While the net borrowing figure of Rs 11.8 lakh crore is broadly in line with expectations, the gross borrowing number is much lower, amid lower redemptions of Rs 2.4 lakh crore against the RBI’s dated securities redemption of Rs 3.6 lakh crore, said Rakshit. This difference of Rs 1.2 lakh crore will be recovered in FY25 from the GST Compensation Fund, which in turn reduces the supply stress from market borrowings.

This bodes well for bond markets in FY2025, said Rakshit, who expects the 10-year benchmark yield to be in the range of 6.70–7.15% in FY25.