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Key takeaways: Despite no change in rates and stance, the Governor’s statement reiterated its commitment to 4.0% inflation mandate. With FY25 growth projection at 7.0% and inflation at 4.5%, the Monetary Policy Committee (MPC) has space to hold policy rates steady in the near term. Amid the delay in commencement as well as downward revision to the quantum of the US Fed rate cut, we do not see MPC easing the policy repo rate before the Fed. We expect the MPC to change its stance to neutral only by Q1FY25 (likely June 2024), preparing the ground for the first cut in Q2FY25. With respect to liquidity, we expect the RBI to remain focused on anchoring the overnight rates closer to the repo rate

Change of stance in Q1FY25; retain first cut expectation in Q2FY25

The MPC unanimously held the policy repo rate at 6.5%, in line with our expectations. It retained its stance on the “withdrawal of accommodation” by a vote of five out of six. We expect the MPC to change its stance to neutral in Q1FY25 with inflation expected to ease incrementally. We retain our FY24E CPI inflation at an average of 5.3% vs RBI’s 5.4% and FY25E at 4.5% same as RBI’s projection with risks balanced currently.

We expect the first repo rate cut by Q2FY25, with overall 75bp cut in FY25E, given inflation is likely to moderate near 4.0% by Q2FY25E. A key risk to our call is stickier inflation stemming from supply-side risks – in potential rise in food and commodity prices -- owing to geopolitical tensions. However, there are tailwinds from continued moderation in core CPI, range-bound global crude oil prices, fiscal consolidation roadmap of the government and steady inflation expectations.

FY25 growth at 7.0%, in line with our expectations

The RBI sounded positive on domestic growth, notwithstanding global uncertainty. It is of the view in FY25, domestic demand conditions are likely to remain robust with steady rural demand, continued buoyancy in the services sector, manufacturing activity, and the investment cycle gaining steam, aided by robust government capex. Considering these factors, the RBI projects FY25 growth at 7.0% vs our estimates of 7.0%, with quarterly projections at 7.2% in Q1FY25 (from 6.7%), 6.8% in Q2FY25 (from 6.5%), 7.0% in Q3FY25 (from 6.4%), and 6.9% in Q4FY25. We agree with the RBI assessment and believe growth will remain supportive through gradual improvement in demand conditions amid softening inflation, a supportive external sector and gradual improvement in private capex

Liquidity concerns transitory; RBI to anchor WACR around Repo

The RBI clarified system liquidity needs to be seen in light of monetary policy transmission and moderation in inflation. RBI believes exogenous, transitory factors such as government cash balances have been the primary drivers of current liquidity conditions and are likely to ease in the upcoming months, led by government spending. The latest weighted average call rate (WACR) at ~6.48% as on 7 February vs ~6.79% in end-January indicates liquidity concerns are gradually easing amid declining government cash balances. Outstanding liquidity stands at ~INR 1.5tn as on 7 February vs CYTD peak deficit of ~INR 3.5tn.

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