Nifty slid on a hawkish hold by the RBI

Summary

RBI holds rate with 5-1 votes; RBI may officially shift to neutral mode in April and start cutting rates from Aug’24 (in line with Fed)

On Thursday (8^th February), the focus of Dalal Street was on the RBI policy meeting (MPC) outcome. As highly expected on Thursday, India’s Central Bank RBI held its benchmark policy repo at 6.5% for the 6^th consecutive meeting without signaling any rate cut talks to ensure sticky/elevated inflation (CPI) eased back towards +4.0 targets, while supporting GDP growth. Although India's annual inflation (CPI) slowed to a four-month low of 4.87% in October, it again surged to a 4-months high of +5.69% in December due to volatile food inflation.

Although, India’s core inflation was steady at around +4% for the last 3 months, officially RBI follows the total CPI target of +4.0%. Also, India’s real GDP growth is now running above +7.0%, above/in line with trend/EBI estimates, RBI is now focusing on bringing back headline CPI towards +4.0% targets on a sustainable basis with a higher for a longer policy without signaling any rate cuts in H2CY24 (unlike major global central banks such as Fed/ECB).

The market was expecting some dovish stance from RBI this time such as the official declaration of the end of the tightening cycle/removal of accommodation stance to a so-called neutral stance and subsequent logical next step of rate cuts amid cooling core inflation almost around 4% targets in a sustainable basis. But RBI/Governor Das sounded less dovish than expected and Nifty slips to some extent on a hawkish hold stance.

Unlike Fed/ECB, RBI, under Governor Das usually does not provide any specific/clear forward guidance, but RBI may officially announce neutral mode/end of tightening cycle in an April meeting before going for 75-100 bps rate cuts from Aug’24 (in line with Fed) as even after rate cuts of 75-100 bps, real core repo rate (compared to core CPI) will be positive and maybe still termed as restrictive rate zone.

Presently, RBI's core repo rate is around +2.00% (repo rate 6.50% - 6M average core CPI 4.50%); thus even if RBI cuts 75 bps in H2CY24 (in line with Fed), it would be around +1.25%, real positive; i.e. restrictive and also within RBI’s range of neutral policy range (1.00-2.00%). In India, RBI never goes to zero/negative real rate (unlike Fed/ECB) to stimulate the economy; RBI always maintains positive real repo rate in a balancing act to ensure no policy flip-flop cycle and financial discipline. A positive real rate is also beneficial for banks & financials amid higher NIM; this will also ensure a robust balance sheet for banks & financials, essential/good for any economy.

On 8^th Feb’24, as highly expected, RBI holds all its key policy rates. RBI kept the benchmark policy repo rate at +6.50%, effective reverse repo rate (SDF) at +6.25%, MSF (Marginal Standing Facility), and Bank rate at +6.75%.

RBI REPO/LENDING RATE

On Thursday (8^th February), RBI projected India’s real GDP growth for FY25 at +7.0%, with estimates of 7.2% for Q1; 6.8% for Q2; 7.0% for Q3; and 6.9% for Q4, while expected headline CPI inflation at +4.5%, with projection 5.0% for Q1; 4.0% for Q2; 4.6% for Q3, and 4.7% for Q4. Meantime, the inflation projection for FY24 was unchanged at 5.4%, and real GDP growth was revised higher to 7.3%.

Full text of RBI Monetary Policy statement: 8^th Feb’24

Monetary Policy Statement, 2023-24 Resolution of the Monetary Policy Committee (MPC) February 6 to 8, 2024

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (February 8, 2024) decided to: Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent. The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.

Assessment and Outlook

Global growth is likely to remain steady in 2024 after a surprisingly resilient performance in a turbulent year gone by. Inflation is edging down from multi-decade highs, with intermittent upticks. Financial market sentiments have been fluctuating with changing views about an early pivot by central banks in advanced economies (AEs). The likelihood of lower interest rates has spurred rallies in equity markets, although uncertainty about the timing of interest rate reduction is reflected in bidirectional movements in the US dollar and sovereign bond yields. Emerging market economies (EMEs) are facing currency fluctuations amidst volatile capital flows.

Domestic economic activity is strengthening. As per the first advance estimates (FAE) released by the National Statistical Office (NSO), real gross domestic product (GDP) is expected to grow by 7.3 percent, year-on-year (y-o-y) in 2023-24, underpinned by strong investment activity. On the supply side, gross value added (GVA) expanded by 6.9 percent in 2023-24, with manufacturing and services sectors as the key drivers.

Looking ahead, recovery in Rabi sowing, sustained profitability in manufacturing, and underlying resilience of services should support economic activity in 2024-25. Among the key drivers on the demand side, household consumption is expected to improve, while prospects of fixed investment remain bright owing to an upturn in the private capex cycle, improved business sentiments, healthy balance sheets of banks and corporates; and the government’s continued thrust on capital expenditure.

Improving the outlook for global trade and rising integration in the global supply chain will support net external demand. Headwinds from geopolitical tensions, volatility in international financial markets and geo-economic fragmentation, however, pose risks to the outlook.

Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7.0 percent with Q1 at 7.2 percent; Q2 at 6.8 percent; Q3 at 7.0 percent; and Q4 at 6.9 percent. The risks are evenly balanced.

From its October 2023 trough of 4.9 percent, CPI inflation increased successively in the next two months to 5.7 percent by December. Food inflation, primarily y-o-y vegetable price increases, drove the pick-up in headline inflation, even as deflation in fuel deepened. Core inflation (CPI inflation excluding food and fuel) softened to a four-year low of 3.8 percent in December.

Going forward, the inflation trajectory will be shaped by the evolving food inflation outlook. Rabi sowing has surpassed last year’s level. The usual seasonal correction in vegetable prices is continuing, though unevenly. Yet considerable uncertainty prevails on the food price outlook from the possibility of adverse weather events. Effective supply-side responses may keep food price pressures under check.

The continuing pass-through of monetary policy actions and stance is keeping core inflation muted. Crude oil prices, however, remain volatile. Manufacturing firms covered in the Reserve Bank’s enterprise surveys expect some softening in the growth of input costs and selling prices in Q4 2023-24, while services and infrastructure firms expect higher input cost pressures and growth in selling prices.

Taking into account these factors, CPI inflation is projected at 5.4 percent for 2023-24 with Q4 at 5.0 percent. Assuming a normal monsoon next year, CPI inflation for 2024-25 is projected at 4.5 percent with Q1 at 5.0 percent; Q2 at 4.0 percent; Q3 at 4.6 percent; and Q4 at 4.7 percent. The risks are evenly balanced.

The MPC noted that domestic economic activity is holding up well and is expected to be backed by the momentum in investment demand, optimistic business sentiments, and rising consumer confidence. On the inflation front, large and repetitive food price shocks are interrupting the pace of disinflation that is led by the moderation of core inflation. Geopolitical events and their impact on supply chains, volatility in international financial markets, and commodity prices are key sources of upside risks to inflation.

The cumulative effect of policy repo rate increases is still working its way through the economy. The MPC will carefully monitor any signs of generalization of food price pressures to non-food prices which can fritter away the gains in the easing of core inflation. As the path of disinflation needs to be sustained, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting. Monetary policy must continue to be actively disinflationary to ensure the anchoring of inflation expectations and fuller transmission. The MPC will remain resolute in its commitment to aligning inflation to the target. The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted to keep the policy repo rate unchanged at 6.50 per cent. Prof. Jayanth R. Varma voted to reduce the policy repo rate by 25 basis points.

Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth. Prof. Jayanth R. Varma voted for a change in stance to neutral.

The minutes of the MPC’s meeting will be published on February 22, 2024.

The next meeting of the MPC is scheduled for April 3 to 5, 2024.”

Bottom line:

Ahead of the election, RBI may not take any undue risk by cutting rates prematurely ahead of the Fed,  causing higher USDINR and higher imported inflation, everything being equal. RBI may shift to neutral mode in April and go for rate cuts from Aug’24, if the Fed goes for the same from July’24.

Technical trading levels: Nifty Future

Whatever the narrative, technically Nifty Future (21698) now has to sustain over 22000/22100-22200/22300* for a further rally to 22450/22675-22850/23025 and 23260-23575 levels in the coming days; otherwise sustaining below 21950/21900 levels, may fall to 21800/21600-21475/21250, and further 21125/20850-20725/20575-20350. And sustaining below 20350, Nifty Future may again fall to 20150/20000-19900/19650 and 19400/19150-18850/18700 in the coming days.