RBI Monetary Policy: Window For Rate Cuts Has Closed, Say Economists

India’s Monetary Policy Committee kept its benchmark policy rate unchanged and continued to maintain an ‘accommodative’ stance. While that was in line with expectations, raising growth and inflation forecasts prompted most economists to say that there may not be any room for further rate cuts.

The Reserve Bank of India now expects the nation’s real GDP to contract 7.5% in the ongoing fiscal compared with a 9.5% decline estimated earlier. Besides, inflation as measured by the Consumer Price Index is estimated to remain well above the MPC’s upper band of 6% in the second half of 2020-21 against 5.4-4.5% predicted in October.

Here’s what economists have to say:

Lower-For-Longer

The Reserve Bank of India resisted blinking despite the high inflation glare, Aurodeep Nandi, India economist at Nomura said in a note.

The RBI has essentially doubled down on its October accommodative guidance and asserted that inflation remains largely supply side-driven and that supporting growth remains its paramount priority. “Our baseline projection is that the RBI will continue keeping policy rates on hold in the near future.”

Anchor Expectations

Besides a unanimous decision to leave rates unchanged, the central bank largely stuck to script on the policy guidance, reinforcing the extended dovish bias heading into 2021, according to Radhika Rao, economist at DBS Bank.

“The dialing up of inflation and growth forecast cements our expectations that the MPC would prefer to settle into a long pause on rates, with a clear intention to anchor policy expectations,” Rao said in a note.

• On liquidity, the governor emphasised that the bias would be to keep conditions accommodative, signalling a preference to tap regular channels.
• Policymakers were likely concerned that specific measures to drain liquidity and correct distortions in money market rates might be misinterpreted as a policy signal, leading to premature tightening in financial conditions and hardening in bond yields.

Inflation To Remain Secondary

“We continue to forecast that the RBI will stay on hold through 2021, as a reviving economy and sticky inflation weigh on its ability to deliver rate cuts,” Rahul Bajoria, chief India economist at Barclays, said in a note. “While the MPC retained its phrasing around the room for rate cuts, our inflation trajectory, and now the RBI’s, does not suggest there is room for a material reduction of policy rates in the near term.”

This preference for continued foreign exchange intervention, reserve building and flush liquidity conditions is ultimately tied to reviving growth and that the RBI may choose to maintain this position until it sees the drivers of growth become broad based, Bajoria said.

Rate Cuts Contingent On Growth

“We reiterate that the rate cut cycle is over for now,” Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said in a note. If at all, any further rate cut will be contingent on weaker-than-expected growth trajectory, such as a sharp deceleration in growth impulses after the festive season or lower-than-expected inflation trajectory.

“We believe that inflation is not yet driven by monetary factors and, hence, surplus liquidity is unlikely to interfere with monetary policy objectives. We do not expect major liquidity withdrawal measures in the near term.”

Space For Rate Cuts Remains

Still, Abheek Barua, chief economist at HDFC Bank, doesn’t want to rule out some space to cut rates.

The absence of any major liquidity absorption measures in the midst of a prolonged inflationary episode and indeed the upward revision of the RBI’s growth and inflation forecasts might be somewhat puzzling, Barua said. “Given its emphasis on growth revival and the suggestion that there is still some more space left for monetary support, another 25-50 basis point cut in the first two quarters of 2021 cannot be ruled out.”

Comfort On Liquidity

While the RBI stayed away from any decisions on absorbing the liquidity surplus in the market, it can potentially address this issue separately and not bring it into the MPC’s fold, said Neeraj Gambhir, head of treasury and markets at Axis Bank. “I wouldn’t rule out some steps here or there to ensure that the short term rates don’t become an endemic issue.”

Gambhir sees the bond markets remain in an “unstable equilibrium” with the 10-year benchmark yield remaining below 6% in the near term. Moving into January, markets will start to focus on the government’s fiscal stance for FY21 and look ahead of normalisation of monetary policy only after the first quarter of next year.

Watch the full conversation with Neeraj Gambhir, head of treasury and markets at Axis Bank below: