In keeping with expectations, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided on Thursday to maintain the same key policy rates.
RBI Policy: Rate reduction expected in H2; Governor unlikely to precede Fed in policy reversal
In keeping with expectations, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) decided on Thursday to maintain the same key policy rates.
In addition to keeping the position, RBI Governor Shaktikanta Das emphasized that the “withdrawal of accommodation” should be considered in the context of “incomplete transmission and inflation ruling above the target of 4% and our efforts bring to it back to the target on a reliable basis.”
The governor of the Reserve Bank of India reaffirmed the organization’s commitment to monitor the changing liquidity landscape, maintain orderly evolution of money market interest rates, and safeguard financial stability.
Economists anticipate that the rate pause will primarily be prolonged for the time being and that the RBI is most likely not in a rush to ease rates and stance. The majority of economists predict that the repo rate will only be lowered in the latter part of 2024.
According to Soumya Kanti Ghosh, Group Chief Economic Adviser at the State Bank of India, “the MPC decision to keep policy repo rate at 6.50% by a decent majority (though not unanimously) indicates the unwavering regulatory commitment to remain focused on withdrawal of accommodation, ensuring inflation gradually corresponds to the target, while contributing to growth.”
The major announcements, in his opinion, suggest a nuanced growth-oriented mindset while also strengthening the financial landscape against any shock. This is because key principles are being brought into line with the rapidly changing global best practices, both exogenous and in-house.
The comfortable macro and market backdrop, according to Emkay Global Financial Services Lead Economist Madhavi Arora, kept the RBI’s policy tone mostly neutral.
“Despite a 5-1 vote on rates, the MPC meeting was comfortably framed by a benign global narrative, tighter system liquidity, and easing core inflation despite stronger growth.” The policy tone was optimistic about catering the requirements for external financing as well as domestic dynamics, despite short-term food-led risks. Arora also mentioned that comfortable inflation trends and growth upgrades were indicated.
As anticipated, the position of “withdrawal of accommodation” remained unchanged. We recognize that the RBI would have an incentive to maintain overnight rates that are closer to the repo rate than MSF/SDF in advance. She also mentioned that some of this would happen naturally in advance.
Arora believes that the RBI will have some leeway to comprehend and adapt to shifting global dynamics if and when the position changes after April. For short-term liquidity fine-tuning, she does not believe that any CRR cuts or OMOs (open market operations) are necessary.
The RBI’s assertion that markets are outperforming central banks is consistent with “Our belief that domestic policy reversal will be a function of fluidity of global narratives, as market debates swing on timing/quantum of global rate cuts ahead.” Although the RBI will keep an eye on financial and macroeconomic stability, Arora points out that it is unlikely to alter its course before the Fed in CY24.
The RBI’s stance is only expected to shift as early as June 2024, according to Bank of Baroda economist Sonal Badhan, and only then if inflation significantly undershoots RBI’s projections.
According to Badhan, “no change in position can be expected before August 2024 if inflation follows RBI’s trajectory.”
RBI Policy on GDP expansion
In FY25, RBI anticipates 7% GDP growth, up from 7.3% in FY24 (per NSO’s advanced estimates). The central bank increased its quarterly growth projections. Q1 growth was estimated at 7.2%, up from 6.7% in the December 2023 policy; Q2 growth was estimated at 6.8%, up from 6.5%; Q3 growth was estimated at 7%, up from 6.4%; and Q4 growth was estimated at 6.9%.
Strong growth is anticipated in FY25 as a result of the services sector’s resilience, the manufacturing sector’s ongoing profitability, the possibility of rising consumer demand, steady Rabi sowing, and the government’s continued emphasis on capital spending. An increase in geopolitical tensions and volatility in global financial markets could lead to negative consequences.
RBI Policy on Inflation Front
The RBI has decreased its Q4FY24 estimate from 5.2% to 5% but has kept its CPI inflation prediction at 5.4% for FY24. The Central Bank projects 4.5% inflation for FY25; Q1 estimates were previously 5.2%, but were lowered to 5%, Q2 to 4%, Q3 to 4.6%, and Q4 to 4.7%.
The RBI has decided to make these downward revisions because it is still confident that this season’s Rabi sowing has been satisfactory and because vegetable prices are currently declining. Additionally, these figures are predicated on the notion that the monsoon will be normal in FY25.
