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The decision on policy rates was not a unanimous decision with Prof. Varma voting for a rate cut which was a first non-unanimous decision on policy rates for a while. The monetary policy stance of “withdrawal of accommodation” was retained with a 5-1 majority as Prof. Varma, consistent with his earlier views and the current view favouring a rate cut, expressed reservation on the stance.

 Acknowledging the steady growth momentum, RBI projected its FY25 GDP growth forecast at 7.00%, which is higher than implied in the Interim budget and also higher than its earlier estimate of 6.50%. The consensus estimate in the market is also in the vicinity of 6.3%. Thus RBI, like last year, has a growth forecast which is above the market consensus. 

The RBI governor, in his statement, highlighted the elevated level of public debt in many countries, including advanced economies which is raising concerns on macroeconomic stability in such countries while in India’s case the fiscal consolidation path and improved growth prospects can lead to the general government debt coming down gradually. As per IMF, the general government debt of India increased to 88.50% of GDP during the pandemic year 2020 which has come down to 81% of GDP in 2022 and is further projected to come down to 80.50% by 2028. 

The MPC statement forecasted FY25 Inflation at 4.50%, assuming normal monsoons while mentioning the fall in core CPI to a 4yr low of 3.80% in December 2023. The RBI governor, in his statement, mentioned that its stance of “withdrawal of accommodation” should be seen in the context of incomplete transmission of repo rate hikes and headline CPI inflation ruling above the 4% target. 

On Liquidity, Deputy Governor Patra mentioned that RBI’s endeavour is to keep overnight rates anchored to the policy repo rate. The governor’s statement mentioned that INR has remained stable compared to both its emerging market peers and a few advanced economies. In terms of coefficient of variation INR exhibited the lowest volatility in 2023-24, which reflected the strength and stability of the Indian economy, its sound macroeconomic fundamentals and financial stability and improved external position.  

Market Reaction 

In the run up to the policy, certain sections of the bond market were expecting a change in the monetary policy stance especially after the lower than expected fiscal deficit in the Interim Budget which did not happen but the market remained steady focussing on the favourable demand/supply  dynamics going ahead. Bond market yields at the longer end had come down and the curve had bull flattened ahead of the policy. The market read the policy as neutral taking into account Prof. Varma’s vote for a rate cut and remained flat after the policy.

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