​RBI’s hawkish stance, rise in crude prices could delay monetary easing

Economists are pushing back on their expectations of interest rate reductions by the RBI as it is signaling that it has a long way to go before lowering interest rates.

Moreover the Israel-Hamas war could add to the risks of oil prices rising above the current assumptions, which in turn could put pressure on inflation and further delay monetary easing.

“ Elevated food and oil price risks amid still-resilient growth suggest policy easing will be delayed. We are pushing out the first rate cut from February to April, while retaining our forecast for 100bp of cuts in 2024” said a note by Nomura Research. “ Supply-side inflation shocks on food and oil are the key risks to our baseline”.

Even local market analysts have been making a case of delayed easing in policy by the monetary authorities. The MPC voted for a continued pause of benchmark policy repo rate at 6.5 percent on expected lines. But the hawkish remarks on the inflation targets and liquidity operations in its statement is what pushed the market to revise their outlook on rates. In addition the surge in US treasury yields is also adding to pessimism on rates.

“ We maintain our call that the MPC will remain on a prolonged pause (well into FY2025), along with liquidity being kept close to neutral” said Upasna Bharadwaj, chief economist at Kotak Mahindra Bank post the October policy statement as against “ We maintain our long-held view of a prolonged pause by the MPC, at least for the rest of FY2024” Bharadwaj said post August policy statement.

Professional forecasters, essentially economists surveyed by the Reserve Bank in September 2023 expect headline CPI inflation to moderate from 6.6 per cent in September quarter to 5.5per cent in December quarter, 5.1 per cent in March’24 quarter and 5.2-4.0 per cent in the first half of 2024-25. Core inflation- CPI excluding food and beverages, pan, tobacco and intoxicants, and fuel and light- expectation was seen at 4.9 per cent in September quarter.But the Reserve Bank’s hawkish stance stressing that inflation target is 4% and not 2-6% and its aim is to align the inflation target to a durable basis along with its surprise decision to conduct open market operation sale of bonds has added caution in the market. “ Risks of a delayed start to the rate-cutting cycle could emerge from sustained increase in oil prices leading to macro stability concerns and or tighter global financial conditions weighing on the currency” said Morgan Stanley which expects monetary easing from the first quarter of FY’25.

Long-run inflation expectations of professional forecasters measured by their 5-year ahead expectations softened to 4.9 per cent while 10-year ahead expectations remained unchanged at 4.5 per cent, based on which the RBI forecast its 2024-25 CPI target at 4.5 percent, which is still above the mandated target of 4 percent.

“ Emphasis on the 4% inflation target and liquidity calibration have been chosen as means to dissuade premature monetary easing expectations” said Mumbai based think tank QuantEco ”Hopefully, this will help anchor expectations”.