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The Reserve Bank of India’s Monetary Policy Committee (MPC) is likely to keep the policy repo rate unchanged at 6.50% and retain the monetary policy stance of ‘withdrawal of accommodation’ at the conclusion of its meeting on April 5, Goldman Sachs opined on Thursday. The RBI would also likely voice optimism on growth, and continue to reiterate the MPC’s commitment to achieving the 4% headline inflation target.
“High frequency data in Q1 CY24 shows a rebound in consumption activity, but softer investment activity as the government front-loaded capex in 2023,” the U.S.-based investment banking and securities firm said in a report. “We forecast headline inflation at 5.2% in Q1 CY24, driven by high food inflation, even as core inflation has declined below the RBI’s target of 4%,” it added.
“We expect the RBI to take comfort from declining core inflation, slightly soften its hawkish forward guidance, but remain cautious given upside risks to food inflation from weather shocks, and repricing of the Fed funds rate easing path,” Goldman observed.
Stating that banking system liquidity had eased with active interventions by the RBI, and government spending over the last month had softened inter-bank rates, and short-term borrowing rates for bank and non-bank entities, the securities firm said once the RBI eventually started its easing cycle, it would run liquidity surpluses and let the inter-bank rate trade below the repo rate. “We forecast one 25 bps cut each in Q3 and Q4 CY24,” Goldman projected.
It said India’s stronger-than-expected Q4 real GDP growth of 8.4% YoY surprised materially to the upside driven by higher investment spending, while private consumption expenditure remained muted.
“Given the stronger-than-expected print and upward revisions to the earlier series by the statistical office, we raised our CY24 growth forecast by 10 bps to 6.6% YoY,” it said.
Goldman also noted that the combined effect of the increase in vegetable and pulses prices along with sticky cereals inflation would likely keep food inflation elevated at 8.1% YoY. “On the other hand, we estimate core inflation (headline inflation excluding food and fuel inflation) to decline modestly by 10 bps to 3.2% YoY,” it added.
