On Wednesday, the central bank kept rates unchanged for the tenth time on trot, though the Monetary Policy Committee (MPC) looked all the more chipper for a policy easing cycle.
Like October that signals a significant shift in seasonal trends, the MPC, meeting for the first time following the appointment of three external members, made a fresh beginning changing the policy stance to neutral even as it held repo rate at 6.5%.
A neutral stance allows RBI to reduce or hike rates depending on the inflation trajectory, unlike an accommodative stance, which simply has no room for rate cuts.
Amid a wave of global monetary easing policies, Governor Shaktikanta Das and his team chose to continue with a sense of therapeutic calm. Headline inflation fell below 4% for two months in a row, yet Das is unwilling to beetle off midway and wants to be doubly sure that the inflation monster isn't simply acting like the undead.
As he stressed, the inflation horse appears to be back in the stable, but the central bank needs to be 'very careful about opening the gate, as the inflation horse may bolt again.'
Having fallen behind the curve in 2022 when price rise peaked, the MPC needs to get it right this time, not only for our benefit, but to uphold its own credibility.
The global market mover, the US Federal Reserve, last week sparked the interest rate cut race with a jumbo 50 bps cut last month, and other central banks are expected to synchronize their moves. Yet, Das is determined to stay devoted to the 4% target, despite hostilities in the Middle East that heighten supply chain risks, yet again.
Moreover, food inflation continues to be a roughneck and though prices eased to 5.6% from double-digit peaks, for households, official indicators may seem all wrong given steep grocery bills. While Das indicated that food price pressures could see some easing in the coming months, thanks to better sowing and weather conditions, he believes that the MPC should remain in the combat room to chase the price rise ghost away.
As for growth and inflation forecasts, the annual projections remained unchanged at 7.2% and 4.5% respectively, although quarterly estimates were adjusted.
For the July-September quarter, inflation was earlier projected at 4.4%, but the actual reading could print lower at about 4-4.1%, as price rise remained below 4% in both July and August. While Das conceded that September inflation is expected to print higher, overall, the Q2 forecast now stands reduced to 4.1%. Likewise, Q3 and Q4 estimates are revised to 4.8%, and 4.2% respectively. Headline inflation in Q1, FY26 is pegged at 4.3%.
Coming to growth, Das stressed more than twice that the Indian economy presents a picture of strength and stability. Though real GDP growth saw signs of moderation, overall it's expected to turn in over 7% growth in FY25.
As if the moderation in Q1 growth to 6.5% wasn't enough, Q2 estimates too were revised lower to 7%. For Q3 and Q4, GDP growth is now pegged at 7.4% each. Real GDP in Q1, FY26 is projected at 7.3%.
In Q1, agriculture growth fell to a disappointing 2%, down from 3.7% a year ago, while the industrial sector saw a mixed bag with manufacturing and electricity doing well, while others like coal and cement bucking under pressure. Though services sector is holding the fort, both agriculture and industry need to gain momentum to make it whole.
According to Das, agriculture growth is now being supported by above normal southwest monsoon, which in turn is expected to encourage rural demand. Helpfully, private investment turned a corner and its share as a percentage of GDP touched the highest level since FY14. Given the economy is robust, as Das outlined with unnerving specificity, it allows enough room for the MPC to remain focused on inflation.
Markets were prepared for the status quo, but were hoping to a dovish policy review, which then could be considered as the strongest hint of an incoming quarter-point rate cut in December. But Das retained his hawkishness, preventing a instant bond rally. If yields eased about 40 bps from the year's peak of 7.25% on the hopes of rate cuts, minutes after the policy review, they remained flat at about 6.74%.