RBI-MPC will continue the repo rate

Chennai: In view of the high inflation rate, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) will continue to keep the repo rate at 6.5 percent, senior economists said. However, there are differing opinions on whether the RBI will change its stance from ‘housing withdrawal’ to ‘neutral’. Repo rate is the rate at which RBI lends to banks. The MPC meeting began on Tuesday and its decision will be announced on Thursday. “Ahead of the Budget announcement, it was not a big deal that there would be a consensus on status quo on both repo rate and stance as inflation remains at 5.7 per cent till December,” said Chief Economist Madan Sabnavis. , Bank of Baroda said. He said there may be an improvement in January but there will definitely not be the satisfaction of having inflation under control as it is more driven by food inflation. “Therefore there is a high possibility that the repo rate will again remain unchanged. In fact, looking at the RBI’s forecasts on inflation for the next year, it can be seen that this number will remain above 5 per cent for the first quarter of FY2025 and will decline to only 4 per cent in the second quarter. After this period, it will increase to 4.7 per cent in the third quarter,” Sabnavis said. He said there is reason to believe that a rate cut can be considered in Q2-FY25 only after there are positive indicators on the inflation and monsoon front. According to CARE Ratings, the overall economic outlook remains upbeat despite challenges in specific sectors. RBI may revise its growth projections. While headline inflation has increased, mainly due to rising food prices, core inflation has remained relatively low. Systemic liquidity has remained in deficit since early December 2023, and money market conditions remain difficult. CARE Ratings said the RBI will likely continue to support liquidity conditions through variable rate repo auctions (VRRs), potentially considering an extension in their tenure. “We expect the MPC to maintain the current interest rates during the upcoming policy meeting,” the credit rating agency said. As for stance, the credit rating agency said a “neutral” policy change is likely in February. “The MPC will consider a rate cut in Q2FY25 when headline inflation approaches 4 per cent,” Care Ratings said. According to Sabnavis, this time also the trend of ‘housing withdrawal’ seems probable. But the market is looking for signals to justify a shift to ‘neutral’. Sabnavis said the idea of change in stance stems from the talk of a lower gross borrowing program for FY2025 in the Union Budget or interim budget. Things changed soon after the budget was announced: The yield on 10-year bonds declined to 7.04 per cent and currently stands at 7.06-7.08 per cent, lower than the pre-Budget yield of 7.12-14 per cent. Overall liquidity in the system has improved which may be due to government spending as durable liquidity has been reduced due to decline in government cash balances. The second supplementary budget presented yesterday also hints at accelerating government spending from now on. RBI is now conducting Variable Rate Reverse Repo (VRRR) auctions to absorb excess liquidity. At the system level, there is definitely pressure on liquidity. This can be seen from the fact that while the growth in deposits on a YTD basis as of January 12 is much higher than last year, the growth in loans and investments at Rs 22.25 lakh crore is more than the growth in deposits at Rs 18.20 lakh crore. Sabnavis said that in terms of growth rate on YTD basis, loans stood at 12.1 per cent (11.7 per cent last year), deposits at 10.1 per cent (7.3 per cent) and investments at 9.1 per cent (10 per cent). “Under these circumstances there is some segment of the market that believes a change in stance is possible, although we believe this will not happen. The fact that the call rates corridor is being maintained between the repo and MSF rate is indicative of the fact that liquidity conditions will continue to return,” Sabnavis commented. State Bank of India (SBI) said in its report that RBI will not change the repo rate and will also continue the ‘accommodative withdrawal’ stance.