From the Bollywood movie ‘Chak De India’ (Dir. Shimit Amin, 2007), the climax sequence has been particularly popular. It is perhaps one of the most popular, inspiring, and quoted pieces of Indian cinema. In one part of the climax, the protagonist (played by Shah Rukh Khan), who is the coach of the Indian national women’s hockey team, is guiding the team in the World Cup final match against the defending champion Australia. During a penalty shootout, the coach tries to anticipate the penalty shot of the Australian striker by reading her body language – leg position, eyes, hockey stick and wrist position etc. – and correctly concludes that the striker will hit the ball straight and guides the Indian goalkeeper to stay still in the middle of the goal post. The goalkeeper saves the critical penalty and India wins the match.
Today the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is meeting for the last time in 2023 to review its monetary policy stance. The Governor of RBI will communicate the decision of the Committee on Friday (8th December) morning. In the meantime, most of the market participants will enact Shah Rukh Khan in anticipating the decision of the MPC, especially about the repo rate.
The overwhelming consensus is that the MPC will decide to maintain a status quo on rates. Nonetheless, a few participants may be placing a wager on a cut or at least an indication to cut in 1H2024. I am not aware of anyone anticipating or waging a hike in rates; though there is no basis to reject this probability altogether.
The RBI had last hiked the key repo rate in February 2023; and has been on a pause since then. It is important to note that after the last meeting of the MPC on 6th October 2023—
(i) 2QFY23 GDP growth (7.6% yoy) has surprised on the upside, beating the RBI estimates (6.5%) by a fairly wide margin. Most agencies and analysts have upgraded their growth forecasts for the entire financial year FY24 by 20-50bps. RBI had estimated FY24 GDP growth to be 6.5%. The growth momentum indicates that the present rates may not be restrictive for growth.
(ii) The RBI has acknowledged heating up in the consumer finance segment. In November 2023, it sought to restrict lending to this segment by enhancing the capital adequacy requirements of lenders. However, there has not been a material rise in the lending rates for unsecured loans to the consumer so far.
(iii) The consumer inflation declined below 5% in October 2023 after four months. The vegetable & fruit prices have again increased in recent weeks. The governor has also indicated upside risk to retail inflation.
(iv) Though the fiscal conditions were mostly under control until October 2023, the promises made during the recently concluded assembly elections could pose a challenge for fiscal discipline.
Obviously, there is scope to discuss the probability of a hike or at least the threat of a hike (hawkish commentary) in this policy. Moreover, the scope to discuss a hike is significantly broader than the scope to discuss a cut (or imminent cut) at this point.
The safer course though would be to assume a continuation of the status quo till more clarity emerges on inflation, fiscal balance, and sustaining of growth momentum in 2HFY24. So as the coach said, “ya allah yeh to seedha maregi” (Oh my God, she will hit it straight).
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