By Madan Sabnavis, Chief Economist, BoB on RBI MPC Policy
The credit policy has definitely indicated that there is scope for another rate cut going ahead even though it has held the repo rate unchanged and also kept the stance as neutral. Ideally one would expect the stance to change first before there is a rate cut. However, this time the policy has stated that there is scope for supporting the growth process going ahead. The bond market ideally should have been affected positively with yields coming down. It is possible that liquidity infusion measures were expected given the rather tight position presently. Here the MPC believes that the measures already taken through the CRR will address this issue.
The higher forecast of growth at 6.8% is a good signal sent as this is also at the higher end of the CEA’s forecast of 6.3-6.8%. This coupled with lower inflation of 2.6% does put the fundamentals in a sweet spot. It also looks like that the RBI is waiting for the transmission of the earlier rate cut of 100 bps to be passed on the lending side.
We could expect a rate cut provided the data supports it in the course of the year. Given that inflation will be 4.5% in Q1 of next year a repo rate of 5.5% will mean a real rate of just 1%. This will be critical when a call is taken given that the low base effect of inflation this year will tend to prop up inflation in FY27.