IGI Logo

The RBI, as expected, kept the repo rate and stance unchanged. The MPC’s focus remained on achieving the inflation target of 4% while growth continues to provide comfort. We expect the RBI to continue to focus on fine-tuning liquidity conditions through VRR/VRRR auctions to gradually anchor overnight rates around the repo rate. We continue to expect the RBI MPC to change its stance to neutral toward end-1QFY25, which is likely to be followed by a shallow rate cut cycle from 3QFY25

Status quo policy with one dissent on both rate action and stance

The RBI MPC voted with a 5-1 majority to hold the repo rate at 6.5% (Dr Varma voted for a 25 bps cut). They also voted to remain focused on the withdrawal of accommodation, with a 5-1 majority (Dr Varma voted for change to neutral). The decision was in line with our expectations, with a continued cautious tone on inflation amid risks from food inflation, international financial market volatility and the ongoing geopolitical conflicts

RBI projects firm growth in FY2025; inflation expected to moderate sharply

The MPC expects real GDP growth at 7% in FY2025 (7.3% in FY2024), with upward revisions to their earlier quarterly estimates (Exhibit 1). The MPC noted support for economic activity from (1) a recovery in rabi sowing, (2) an expected improvement in household consumption, (2) an upturn in the private capex cycle, (3) the central government’s continued capex push and (4) the healthy balance sheets of banks and corporates. Risks remain from geopolitical tensions.

The MPC projects FY2025 headline inflation at 4.5% (Kotak: 4.5%), down from the FY2024 projection of 5.4% (Kotak: 5.4%). The MPC noted that the monetary policy actions’ pass-through was keeping core inflation in check while supplyside responses may keep food prices under check. However, considerable uncertainties about the outlook remain from adverse weather, geopolitical events impacting supply chains and volatility in the global financial markets.

Change in stance likely in end-1QFY25; rate cuts from 3QFY25

The RBI has explicitly linked the stance with the policy rate in this policy. This will imply that the stance change will be more linked to inflation and the growth outlook than to liquidity, which will be modulated to anchor overnight rates around the repo rate. The RBI will be cautious in changing the stance and in reducing rates, given (1) growth is expected to remain strong at around 7% in FY2025 (FY2024: 7.3%) and (2) continued uncertainties in the food inflation outlook. The expected growth profile provides the RBI with the space to target the 4% inflation mark—we do not expect inflation to settle around 4% in FY2025. Any early policy shift at this juncture could send a mixed message on the target unless either global or domestic growth weakens. We expect the stance to change to “neutral” by end-1QFY25 with rate cuts starting in 3QFY25, conditional on (1) easing pressures from food inflation and (2) the Fed’s rate cut cycle starting in 2HCY24.

Above views are of the author and not of the website kindly read disclaimer