New Delhi [India], October 10 : Reserve Bank of India's (RBI) decision to keep the repo rate unchanged and change the policy stance to neutral indicates that inflation is still the main concern for the central bank, according to a research report by Union Bank of India.
"The strong wording of the stance reflects that the MPC remains focused on inflation dynamics. With the next 2-3 inflation prints likely to switch back to the 5 per cent handle before likely easing in inflation pressures by end-Q3 / Q4- FY25" said the UBI report
The report further adds that RBI is unlikely to go for a rate cut in December as inflation is showing an upward trend. "We maintain our call of the first rate cut in Q4-FY25."
With a likely rate cut in Q4-FY25 or the February cycle of the monetary policy, RBI may also go for a significant downward revision of the GDP forecast from the current 7.2 per cent for FY25.
"However, we note that a significant downward revision in growth forecasts from 7.2 per cent is warranted before starting rate cut cycle." says the report
UBI report also talks about global factors which may have its impact on inflation in India.
"We will closely watch for risks for both inflation (domestic food prices amid unseasonal rainfall risks, geopolitics led spike in oil prices, China stimulus & US Presidential election impact on global inflation) and more importantly, growth as a significant downward revision from the current 7.2 per cent growth forecast is warranted before starting rate cut cycle."
However, bank's credit deposit ratio is improving which will increase lending supporting growth.
"While the credit-deposit growth wedge has narrowed to lowest in more than 2 years at 150bps, funding issues remain for banks with 1-year certificate of deposit (CD) and T-bill spread elevated at more than 100bps currently."
The overall policy guidance is finely balanced with unchanged growth and inflation projections, but RBI's governor Shaktikanta Das has flagged risks of inflation from weather shocks and its impact on food prices in the domestic market along with geo-politics led spike in commodity prices.
Shaktikanta Das assertion that "inflation horse has been brought to the stable but we must keep the horse under tight lease" indicates that MPC is concerned of the next 2-3 inflation cycles and not going for a rate cut till inflation risks materialise.
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