Monetary policy review: Optimism on growth, caution on inflation

Five of the six members of the RBI's MPC panel have voted for the status quo on both the policy rate and stance

There is no surprise in the first monetary policy of the financial year 2024-25 (FY25).

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to keep the policy repo rate unchanged at 6.5 per cent; the stance of the policy too remains the same — “withdrawal of accommodation”. 

Five of the six members of the Indian central bank’s rate-setting panel have voted for the status quo on both the policy rate as well as the stance.

RBI Governor Shaktikanta Das doesn’t lose any opportunity to emphasise that the central bank wants to bottle the inflation genie at 4 per cent target while supporting growth and this policy is no exception.

There is no change in the RBI’s growth projection as well as inflation in FY24 from what it had estimated in February.

The real gross domestic product (GDP) growth for the current financial year is projected at 7 per cent. The quarterwise break ups are: 7.1 per cent in the first quarter; 6.9 per cent in the second quarter; 7 per cent each in the third and fourth quarter.

Similarly, the CPI inflation projection for the current year is 4.5 per cent. Here, the quarterwise break ups are: 4.9 per cent in the first quarter; 3.8 per cent in the second quarter; 4.6 per cent in the third quarter; and, finally, 4.5 per cent in the fourth quarter.

The risks for both the growth as well as inflation projections are “evenly balanced” — something the RBI had said in February too.

Incidentally, since the February policy, the growth-inflation dynamics have played out favourably. While growth has been continuing with its momentum surpassing all projections, the headline inflation has eased to 5.1 per cent in January and February 2024 from 5.7 per cent in December 2023. What more, core inflation has been declining steadily over the past nine months to its lowest level.

In the absence of any surprise, the market has given a thumbs up to the policy. It has been smooth sailing for the first multiple price auction of government bonds in the new financial year, held after the policy. The 10-year paper coupon at the auction is fixed at 7.10 per cent. The local currency strengthened 15.25 paise vis-à-vis dollar to close the day at 83.34.

What is the undertone of the policy? Has it given any forward guidance?

The undertone of the policy is neither dovish nor hawkish. It seems that the RBI is sitting pretty with inflation on a downward movement and growth momentum continuing. The icing on the cake is macroeconomic stability and robustness of the financial system. The central bank’s optimism on growth is palpable; at the same time, it is cautious on inflation.

In fact, it says that the strong growth momentum gives it the policy space to “unwaveringly focus on price stability”. Through the policy statement, Governor Das has repeated the resolve to ensure price stability on an enduring basis several times.

This is the eighth successive MPC meeting where there has been no change in the policy rate as well as the stance. When will we see the first rate cut?

Theoretically, it won’t happen in FY25 as the inflation estimate for the year is 4.5 per cent and the objective of the RBI is to bring it down to 4 per cent. If the RBI sticks to its stance on inflation, the rate cut can happen this year only if there is a dramatic slowdown on the growth front or there’s surprise on the inflation trajectory — settling for a lower level than the estimate. Simply put unless the growth falters or inflation undershoots there’s no chance of a rate cut this year.

But that's the theory. On the ground, things can roll differently. In the current volatile global scenario, no central bank is taking a long call. Even the dot plots are changing.

A new MPC will be in place in October (with three new external members). I guess no rate action will happen during the tenure of the current MPC. The earliest the RBI may change the stance could be in August (to neutral) before taking any call on rates in October or even later. The RBI’s inflation estimate for the second quarter (July-September) is 3.8 per cent. This is not given. We need to wait for the steps the US Federal Reserve takes on the rate front and the post-elections reality in India.

The writer is an author and senior advisor to Jana Small Finance Bank Ltd . His latest book is Roller Coaster: An Affair with Banking. To read his previous columns,  please log on to www.bankerstrust.in

X: @TamalBandyo