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Below the Perspective on RBI MPC Announcement by Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Services 

RBI MPC: Vote Split on Rate Cut Increases, But Easing Cycle Still Stay Elusive in CY'24:

No change in repo rate, with a 4-2 vote split, led by two external members (vs 5-1 prior) on the rate action and stance. RBI reiterated that policy must continue to be actively disinflationary to ensure fuller transmission and the last mile of disinflation is still tricky.

Prof Ashima Goyal has now joined Prof Varma in the rate-cut wagon. The last MPC minutes in April depicted that she was steadily leaning towards a softer stance - arguing on real rates above neutral no excess demand and contractionary policy despite possible repo cut.

* The policy tone today was confident on domestic dynamics, with an upgrade in FY25 growth but no change in inflation trends despite near-term food-led risks (RBI: 4.5%, Emkay: 4.6%). Softening headline inflation will be driven by falling core prices (historically low services inflation) and contained goods inflation.

* The RBI now sees FY25 growth at 7.2% (vs. 7.0 earlier; Emkay: 6.5%) on account of revival in rural areas, steady discretionary spending in urban areas, healthy bank + corp balance sheets and govt's capex focus. We continue to see FY25E GDP ease sharply to ~6.5%, amid cyclical headwinds and mean reversion of technical factors.

RBI insists policy cuts are not (merely) a function of Fed

* While the RBI took recognition of the fluidity of global narratives, the governor insisted that their policy reaction function is driven primarily by domestic dynamics.  He even argued that there may be a situation in which the RBI may not cut rates even as the Fed cuts.

* However, we note that swift policy turns/pivots in the last two years have been purely influenced by global factors. This implies that when needed, the aim of financial stability may even precede inflation management.

Policy rate action will likely be a story of CY'25.

* We maintain that the RBI will not precede the Fed in any policy reversal in CY24 and policy management will have to stay vigilant amid the fluidity of global narratives. Anchor rates like the RBI policy rate change will likely be a story from 1QCY25, assuming Fed cuts shift to next year. However, other factors like liquidity could keep RBI on tenterhooks on policy management.

…but liquidity management will be a story next few months

* The RBI likely will have the problem of plenty in the domestic market in the coming months on stance and liquidity management. We see the net liquidity surplus averaging ~0.5-0.8% of NDTL in the next three months vs average deficit of ~0.5% of NDTL in May.

* While this would lead the call money rate to stay at or mildly lower than the repo rate, we do not see the RBI taking any imminent drastic action to suck out this liquidity durably from the system through blunt tools like OMOs (although regular tools like VRRR will continue).

* This is especially true as there has been coordinated fiscal, monetary, and regulatory tightening in the economy. The overall inflation dynamics have been favorable, and unless there is a material upside deviation from forecasts, the ensuing liquidity surplus will not spur the RBI into action, assuming global rates remain soft..

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