The economists expect the monetary policy committee (MPC) to sound optimistic on growth and to reiterate its commitment to the central bank’s 4% headline inflation target.

Most economists polled also expect the MPC to keep inflation and GDP growth forecasts unchanged at 5.4% and 7%, respectively, for FY24. They also expect RBI to announce its growth forecast for FY25.

The committee is scheduled to meet for three days beginning 6 February and announce its review on 8 February. In a report released on 2 February, Goldman Sachs’s assessment of the MPC’s position on the repo rate and headline inflation target was similar to the predictions of Mint’s poll of economists.

In addition, the report said: “We further expect RBI to retain its tight liquidity stance as signalled by the comment that they will ‘remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth’.”

The repo rate is expected to remain unchanged till Q3CY24 (July-August 2024), the global investment bank added in its report.

Since the previous policy announcement on 8 December, retail inflation has risen to a four-month high of 5.7% in December from 5.5% a month ago. This was led by food inflation, which rose to 9.53% in December from 8.7% in November and 4.19% a year ago due to a spike in prices of vegetables. In the same period, core inflation fell to 3.8% from 4.05% in November largely due to low input costs.

Economic activity indicators for the third quarter (October-December) broadly showed mixed trends compared with the second quarter.

Liquidity conditions have remained consistently in deficit since the December 2023 MPC. System liquidity widened to a record ₹3.46 trillion on 24 January compared with liquidity deficit of ₹44,284.92 crore on 14 December on the back of tax outflows due to goods and services tax.

The central bank has been providing liquidity to the market via liquidity-adjust facility operations. A rise in portfolio inflows, government spending prior to elections, and manageable requirements from trade deficits could lead to an easing of liquidity pressures at the margin, say economists.

According to Upasna Bharadwaj, chief economist at Kotak Mahindra Bank, the persistent hovering of overnight rates 25-30bp higher than repo rate will need attention from RBI. Overnight market rates are supposed to be contained within the rate corridor, with the RBI’s monetary policy framework saying that it aims to align the weighted average call rate with the repo rate through proactive liquidity management.

“As the fiscal year draws to a close in March, residual government spending, and likely net positive FPI (foreign portfolio investment) flows suggest liquidity pressures may ease,” said Rahul Bajoria, managing director and head of emerging markets Asia economics (excluding China), at Barclays Bank. “As the global monetary cycle moves towards easing around March-April 2024 (US Federal Reserve and European Central Bank), we think the RBI will signal a pivot in the April MPC by changing the stance to ‘neutral’. Until then, it is likely to continue to provide liquidity as needed, without an outright change in stance.” On the other hand, a non-inflationary interim budget could smoothen the path for an easy monetary policy going forward, economists said, adding that RBI will be in no hurry to cut rates and will instead follow the US Fed.

The interim budget announced by finance minister Nirmala Sitharaman on 1 February has stayed on the fiscal consolidation path by aiming to cut the fiscal deficit by 70 bps to 5.1% of GDP in FY25.

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Published: 04 Feb 2024, 10:54 PM IST