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Focus on maintaining market stability

The April MPC meeting minutes reflect RBI’s comfort on favourable domestic dynamics, while concerns remained around the possibility of food price spikes. The MPC also seems to be focused on maintaining stability in markets, in contrast to repricing seen in DMs, with anchoring inflation expectations a key factor for keeping rates on hold. Better growth dynamics also provide more room to focus on inflation. Thus, with comfortable domestic conditions, global dynamics will play a major role in the RBI’s reaction function. We maintain that the RBI will not precede the Fed in any policy reversal in CY24, but policy management will have to stay vigilant

Policy position remains comfortable yet watchful

The April MPC meeting minutes reveal that the MPC’s overall stance has not changed much from the February meeting. There was encouragement taken from the domestic growth dynamics, while the ongoing moderation in headline and core inflation was also acknowledged. However, concerns around the possibility of upcoming food price shocks due to adverse weather, as well as a need to durably anchor inflation expectations, and the healthy domestic growth trajectory, meant that the majority of MPC members (5-1) continued to back a pause in rate action as well as status quo on the stance.

Maintaining financial stability a key factor behind continued pause

Most MPC members, including the Governor, mentioned the need to anchor inflation expectations decisively, and maintaining financial stability, as major factors behind the rate pause at present. Dr. Ranjan mentioned the fact that market expectations of early DM rate cuts have seen significant and rapid repricing due to incoming data, which has added uncertainty and volatility to the market. This was also echoed by Dr. Goyal, who also explicitly ruled out providing forward guidance for rates by citing the example of the US. Dr. Ranjan stated that market expectations are far better aligned with the MPC in India, and this is allowing long-term inflation expectations to be anchored. Further, even if price shocks from food or commodities were to materialize, this would allow the pass-through of such shocks to be lower. Additionally, both Dr. Patra and Gov. Das stated that while inflation expectations are getting anchored, achieving this on a durable basis is crucial to achieve the inflation target. Dr. Patra also mentioned that financial stability risks in India need to be continuously monitored and pre-emptively tackled despite improving growth trends. The overall tone and comments therefore suggest that the RBI does not want to introduce unnecessary volatility in the market, especially during a phase of global geopolitical uncertainty, and therefore rates are likely to be on hold for some time going ahead.

Higher real interest rates do not seem to be a concern…

There were a couple of comments on real interest rates but with differing inferences. Prof. Varma’s dissent was largely based on the fact that current real policy rates of 2% (based on FY25 projected inflation) are excessive, and that a real rate of 1-1.5% should be sufficient to bring inflation down to target without sacrificing growth. Dr. Goyal also stated that real rates are currently higher than the neutral rate, but this is not a concern at present since growth remains strong and investment is rising along with robust credit growth. She also opined that maintaining stability is a priority at this juncture as justification for holding rates steady.

…due to better domestic growth dynamics

Gov. Das and Dr. Ranjan also stated that the current growth momentum and dynamics provide more room for the MPC to focus on inflation, with price stability playing a crucial role in maintaining the high growth trajectory going forward. With only Prof. Varma speaking about slower growth projections for FY25 vs FY24, it is clear that the MPC’s focus is on inflation rather than growth at present, in terms of domestic factors. However, we continue to maintain that global dynamics will continue to play a major role in the RBI’s reaction function, especially with a comfortable domestic macro environment. We maintain that the RBI will not precede the Fed in any policy reversal in CY24, but policy management will have to stay vigilant. We see FY25E inflation at 4.6% (RBI: 4.5%), with core at 3.7-3.8%.

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