RBI MPC Outcome : Status quo maintained; No change in Policy Stance

 The Reserve Bank of India in its Monetary Policy Committee meeting which concluded today continued to maintain the Repo Rates at 6.5% (with a majority of 4-2) primary driven with an objective to ensure that inflation progressively aligns to the target, while supporting growth. The governor emphasized on the need to remain vigilant and the need to keep the policy disinflationary to tackle the food inflation consistently at it’s target rate of 4% even though the economy is doing well on the back of urban consumption, private investments, and rural demand recovery.

 

Inflation forecasts were revised upwards given the fact that inflation is expected to be higher on account of food inflation. The GDP forecast for Q1FY26 were released at a moderate 7.2% based on updated high frequency data.

 

 

Key updates were as below:

 

1. Monsoon: The monsoon has covered the entire country 7% above its long term average and the water level in 150 major reservoir level stood at 51% which is higher than the decadal average. We are however cautious on the excessive rainfall La-Nina events are often associated with excessive rainfall which could lead to flooding, waterlogging and impact crop harvest in certain region. This is expected to be good for hygiene care products but are expected to impact food inflation (expected to rise).

 

2. Rural Consumption: Good rainfall along with higher sowing of Kharif crops along with higher area under sowing for crops like pulses, coarse, oilseeds (compared to last year) would mean that rural recovery is on the cards. This is further validated by the demand of Job under MNERGA declined by 21.7% in June’24 implying the buoyancy in farm sector employment. This matches well with the growth in sale of 2W which grew by 21.3% in June’24.

 

3. Urban Consumption: Urban consumptions seems to be picking up with consumer durable growing at 12.3% (in May’24); Passenger Vehicle sales improving by 4.9% (in June’24) and domestic air passenger nos. witnessing a growth of 6.9% in June’24 and 6% in July’24. The growth in air passenger appears to be very healthy since the base in earlier year was very high (19.2% in June’23 and 26.3% in July’23)

 

4. Manufacturing Companies’ Profitability: The result of 483 listed manufacturing companies released so far have shown gross profit rising by only 4.7% in Q1FY25 against 7% in Q4FY24. This despite government push on various PLI scheme shows that the companies are still not able to pass on the rise in cost to the end consumers.

 

5. Government Spending: The capex of by Central & State Government fallen by 35.0% and 22.1% respectively whereas the revenue expenditure contracted by 1.5% and 0.2% respectively showing government intention of inducing private capex to pickup going ahead and manage fiscal consolidation.

 

6. Capex: The Capacity utilization in manufacturing stood at 76.8% in Q4FY24 (highest in 11 years). The Steel consumption rose by 14.6% in July’24 and the import of capital goods increased by 11.6% during June’24 implying that the private capex may have just begun.

 

7. Four Risk to the Banking Sector: The RBI highlighted the four key issues most of which the governor has been highlighting in various forum

 

1. The Bank needs to find innovative method to mobilize deposits from household savings which are getting diverted to alternative asset classes to avoid any systematic liquidity risk
2. Certain segment of personal growth (Credit Card outstanding) though reducing (compared to previous period) continues to growth 23.3% in June’24 against Nov’23.
3. In Certain entities the end use in cases of Home Loan Top-up loans needs better monitoring as the money via home loan top-up may find it’s end use in speculative activities.
4. The Bank need to plan their Business Continuity Plan (BPC) to manage the risk of technological failure (CrowdStrike).
7. Proposals for Individual Customer:
1. Increased the limit of tax payment via UPI to INR 5 Lakhs from INR 1 Lakh
2. Introduction of Delegated Payment on UPI Platforms to enable one individual (primary user) to another individual (secondary user) upto certain limits from primary user’s bank account
3. Reduction in cheque clearing processing time from 2 working days to “continuous clearing” i.e. cheques would get cleared within hours of being presented.

 

Outlook:

 

1. We believe RBI in not in a hurry to change the policy stance/guide for a rate cut given the fact that the food inflation is expected to be higher in the Q2 & Q3 of FY24 led by La-Nino (we have been saying this for a while). The Tomato, Onion and Potatoes increased by 62.1% vis-à-vis 22.6% and 18% during July and this along with tariff hike impact by telecom operators of upto 22% is expected to result into a higher CPI print for July’24 ( actual data to be released on 12^th August).

 

2. However, with a synchronized global growth downturn, expectation of a likely rate cut by FED in September and normal monsoon progression with contained core inflation implies that the policy focus may shift from inflation control to supporting growth but in a gradual and orderly manner.