 "Amruta Ghare and Shreya Sodhani are regional economists at Barclays")
The Monetary Policy Committee’s (MPC) decision to keep policy rates unchanged was along expected lines. But what made this policy announcement slightly different was the RBI’s increased optimism on India’s growth outlook. At the same time, this meeting also witnessed signs of increasing divergence in views between the six members of the MPC. The decision to remain on hold was agreed with a 4-2 vote, with the two dissenting members arguing for a cut in rates. So, while the central bank expects India’s GDP growth to remain strong, two members of the MPC see the need for monetary policy easing, likely to support growth. How does one reconcile the two?
Both Governor Das’s statement and the MPC statement indicate confidence on India’s growth trajectory: at 8.2 per cent, India’s real GDP growth in FY2023-24 outperformed all major economies. For the current FY2024-25, the bank revised its growth projections upwards, to 7.2 per cent from 7 per cent. It expects growth to be robust across sectors: an above-normal monsoon supporting agriculture and rural demand, and sustained momentum in manufacturing and services, enabling a revival private consumption. Private investment is also likely to pick up, on the back of elevated capacity utilisation levels and government capex. Interestingly, it sees risks to growth arising only from the external channel: through geopolitical tensions or volatile commodity prices.
On the other hand, the dissent from the two members of the MPC likely was driven by the risk of keeping interest rates ‘too high for too long.’ In views shared earlier, both dissenting members argued that high interest rates also entail a growth sacrifice. That is, maintaining real interest rates at elevated levels for a prolonged period to counter inflation, could eventually weigh on growth given the rise in the cost of capital.
Ultimately, in the current growth/inflation tradeoff argument, the RBI is clearly focused on inflation, evoking the metaphor of ‘Arjuna’s eye’. While inflation moderated to 4.8 per cent in April 2024 from an average of 5.4 per cent in FY2023-24, it remains some distance from the bank’s medium-term target of 4 per cent. The RBI appears particularly wary of elevated food inflation for the spillover risks it poses to other components of inflation. While the projection of a normal monsoon is likely to offer some relief, we think the RBI will want to wait for the monsoon to pan out before considering monetary easing. The central bank keeping its inflation forecasts for the current year unchanged also reflects its ‘wait-and-see’ approach.
What does this imply for the outlook for monetary policy? The central bank keeping rates on hold for eight consecutive meetings shows increased comfort with policy settings. The optimistic tone struck on India’s growth resilience and robust projections suggests to us that the majority of MPC members see little urgency to cut rates, as of now. Indeed, we see risks of a prolonged pause on rates and a shallow rate cutting cycle when it comes. Globally, we see divergence in monetary policy outcomes within advanced economies, with some central banks already easing rates while others remain on hold: the RBI has clearly indicated it is not following any of them.
Shreya Sodhani and Amruta Ghare are regional economists at Barclays
