MPC: We don’t expect rate cut in 2024 unless growth or inflation surprises on downside: Tanvee Gupta Jain

“I would say most of the forecast will be retained. A lot of focus will be on the upcoming budget and the policy henceforth rather than expecting really meaningful on Friday’s policy,” says Tanvee Gupta Jain, Chief India Economist, UBS Securities India.

Well, a rate cut or a rate action clearly is not on the cards, but what else are you expecting? What are the other big things you are watching out for?
I would say at this point election results are on everyone’s mind and looking at India’s Goldilocks scenario plus I think the focus will be on the upcoming budget announcement, I would say at this point MPC will shy away to change either the policy rates or stance at this juncture. So, I would say most of the forecast will be retained. A lot of focus will be on the upcoming budget and the policy henceforth rather than expecting really meaningful on Friday’s policy.

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We actually have a status quo in rates and stance at this juncture. Even though we do expect a shallow rate cut easing of 50 basis point, but that too from early next year. So, we really do not have any rate cut expectation for this calendar year 2024. But like you are highlighting, everyone was watching out for those election results, how those reforms and reforms will change or the focus maybe of the government could change on certain other sectors, social spending. How do you see that in terms of the policy then moving forward? Any change you could expect, maybe not on Friday, but even next time and the expectation there that one could watch out for?
Clearly, I think the political outcome was suggesting that there is kind of a weak sentiment at the lower end of the income pyramid. And whether we accept it or not but India has seen a K-shaped consumption recovery post the pandemic. So, most of the high frequency data that we track are clearly indicating that affluent, premium segment demand in India has been doing well.

But demand for entry level, mass market goods has remained muted. So, maybe it is hinting you at some point that the income levels at the bottom end of the pyramid, which I think were the most affected, their income levels have not gained to the level where they start spending again. So, I would say from a policy choice perspective, which I think will be one of the biggest focus for investors, will be whether the government while adhering to the fiscal consolidation roadmap actually increased political spending or politics spending depending upon which sector of the economy the focus will be.

So, we are highlighting two sectors. One is we still see, irrespective of the election outcome, that the capex thrust will continue. We did see in the interim budget, there was a 17% growth in central government capex spending, so I do not see that numbers to be brought down. However, that bonanza that government got from the RBI in terms of higher dividend transfer, we think that that fiscal leeway could be used to increase the populist spending to support consumption, especially for the lower income strata, stuff like a cash transfer, a higher outlay for affordable housing, a higher outlay for rural spending, some kind of income tax rationalisation are the things which I would keep a close tab on.
When you say that there could be some income tax rationalisation, we could all clearly do with that. But it might be very naive and simple for me to ask that but help me understand, if the social spending does go up, there could be some cash transfers or benefits, etc, as well, what happens to the inflation estimates then? Would not it inch up?
A very, very valid question. So, if you have seen India’s economic growth over the past 12 months, you would have realised that economic growth was resilient, but macro risk under control, that is why we were all saying a Goldilocks scenario for India.

Now, if there is a populist bias, clearly it would widen the macro stability risk, especially inflation, fiscal deficit may not narrow as much as what we had been expecting and they could also be widening in the current deficit.
So, for this year, I think inflation has been very-very well behaved. We are expecting a 4.5% inflation for the full year. But I would say in September quarter my inflation forecasts are actually coming somewhere around 3.5-4% so even lower than where RBI is highlighting. Let us hope the monsoons will be better this year so that also bodes well for the food inflation.

I would say most of the populist spending risk, widening macro stability concerns will show up not in this year’s number, but they will begin to show up in case there is a massive populist spending only in FY26. In that scenario, I would say there could be a 50 basis point upside to my inflation forecast. But that will show up after 12 months, not something that I am expecting immediately to start showing up in numbers.

Just a question that you were talking about that you are not expecting a rate cut this time or this year in 2024. But while there are expectations that Fed is going to be cutting the rate, maybe at least from October onwards in terms of commentary that we are understanding, then would that be a possibility if Fed cuts rate in October, then would RBI follow suit because we were expecting them to come with a rate cut earlier than the Fed. So, any change that has happened in the stance for you because of any other reason or your expectation was 2024 no rate cut?
One more interesting thing which I think the market should definitely look at is that RBI has been tightening the regulatory norms to bring down unsecured loan growth. It was growing at 20-25% or it is growing at 17% and we have also seen regulatory tightening for NBFC.

At a time when you are giving a message that I am not very happy with a lot of bank credit incremental going towards consumption and I am trying to bring it down because I want to ensure that there are no financial stability risk and plus your macro is so strong that, then there is no need for a rate cut.

So, when I look at the Fed rate versus the repo rate, the gap is the lowest in 20 years. So, even if Fed begins to cut and UBS expectation is for the Fed’s rate cut to begin from September, we do have a 50 basis point rate cut expectation for this calendar year 2024.

I do not see RBI is in any hurry to follow suit. Yes, we do expect a shallow easing cycle if the global monetary easing is happening, but they can obviously take some more time to start begin that phase.

Even if you look at the data, the RBI has clearly mentioned that they are looking at a much higher potential growth for India than what they were estimating earlier.

So, the real rate, which normally RBI came out with a report should be somewhere between the range of 75 to 125 basis point, we think that the real rate in this cycle has to be at least 150 basis point if we want to sustain a potential growth, which is somewhere around 6.5% to 7%. So, we will believe that a room for rate cut for India will be limited unless the growth or inflation surprises on the downside.

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