RBI may shift monetary stance to 'Neutral'; rate cuts likely by December 2024: Nuvama
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he Reserve Bank of India (RBI) will shift its monetary stance to 'neutral' from the current 'withdrawal of accommodation' in credit policy this month, with rate cuts likely to commence from December, according to a report by Nuvama.
As per the report, the Monetary Policy Committee (MPC) is likely to maintain the repo rate at 6.5 percent in its upcoming meeting. However, several factors, including a slowdown in economic activity and benign core inflation, are likely to prompt the central bank to soften its stance. A weaker-than-expected Q1 GDP growth, continued slowing of high-frequency indicators in the second quarter, core inflation nearing record lows, and fiscal tightening could be key reasons behind this move.
Additionally, the recent actions of the U.S. Federal Reserve, which indicate a potential easing of rates, will influence the apex bank's decision. The growth rate for the first quarter of the financial year 2025 was below the RBI's projection of 7 percent, standing at 6.7 percent, signaling weak economic activity. Since then, indicators such as vehicle sales, cement volumes, fuel consumption, GST collections, and rural wages have shown sluggishness. Government spending has also been subdued in recent months, and exports have experienced a downturn after an initial recovery earlier this year.
Overall, domestic demand is slowing amid weak exports. At the same time, fiscal policy is tightening while core inflation is near a series low. Against this evolving growth-inflation mix, a tight monetary stance may not be warranted, particularly when the Fed has also commenced easing.
Going forward, the report highlights that the economy may be reverting to pre-pandemic levels of weak demand, with capital expenditure-to-GDP ratios plateauing. While headline inflation remains above target, core inflation has consistently declined over the past 16 months, currently ranging between 3.1 percent and 3.3 percent. This reflects weak pricing power in the economy and muted growth in consumption-driven sectors.
Furthermore, it states that the RBI's fiscal policy is contractionary, with tax revenue growth declining into the single digits. This could affect the government's ability to increase capital expenditure in the upcoming quarters. Given the slowing domestic demand, weak exports, and tightening fiscal stance, the RBI's current monetary stance may no longer be appropriate, according to the report. (ANI)
✔️ RBI may shift monetary stance to 'Neutral'; rate cuts likely by December 2024: Nuvama
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