The Reserve Bank of India's rate-setting panel - the Monetary Policy Committee - unanimously voted to keep the key repo rate unchanged at 6.50% on Thursday, barring one dissenter -- Prof Jayanth R Varma -- who sought a 25 basis points cut.
In its first bi-monthly policy meeting of 2024, the central bank projected lower inflation and higher growth for the next fiscal year, while emphasizing the need to ensure the easing price rise trend sticks toward the 4% target.
The decision comes amid signs of resilience in the Indian economy and early indications of softening retail and core inflation. Moreover, RBI continued to maintain that the cumulative 250 basis points tightening since the start of 2022 is still working its way through the economy.
With inflation expected to moderate closer to target, albeit at a slow pace, the RBI has avoided putting a brake on the investment-led recovery prematurely through aggressive tightening. At the same time, the central bank stressed that the policy stance needs to remain disinflationary to anchor expectations and ensure full transmission to loan and deposit rates.
GDP growth seen at 7%
The RBI's forecast for next fiscal year is a notch lower at 7%, owing to continuing headwinds from the global environment. It projected Q1 FY25 growth at 7.2%, Q2 at 6.8%, Q3 at 7% and Q4 at 6.9%. In the first advance GDP estimates released last month, India’s National Statistical Office expected the economy to grow 7.3% in 2023-24. The year-before had seen GDP growth of 7.2%.
The MPC's rationale for the robust projection is that investment activity remains robust in India, while a rebound in farm output due to higher rabi acreage and resilient domestic consumption will support growth. Easing global supply snags are also seen aiding export demand. However, it warned that global slowdown fears, financial market volatility and geopolitical tensions could play spoilsport.
Upside Risks to Inflation
Retail inflation measured by the CPI index has seen monthly fluctuations. Food inflation, primarily vegetables, led the spike in November and December, even as fuel and core inflation moderated.
Assuming a normal monsoon, the RBI expects this trend to sustain - projecting CPI inflation at 5.4% in FY24 and 4.5% in FY25.
Food inflation poses upside risks contingent on the weather outlook. But the cushion from softening core inflation, pass-through of past rate hikes and supply responses may help counter pressures.
While headline CPI trajectory remains contingent on the food inflation outlook to a large extent, the fall in non-food core inflation -- below 4% -- provides some comfort. The RBI indicated it would watch for any generalisation of food price rise into broader categories which can negate the easing core trend achieved so far.
The largely along-expected decision, including the 5-1 vote in favor of the pause, signals RBI’s data-dependent strategy amid an improving inflation-growth mix following the coordinated global monetary policy tightening last year.
With price rise seen as a key risk to growth not just in India but worldwide, the RBI joins peers like the U.S. Fed in avoiding aggressive action before disinflation is more definitive. Its focus also remains more on anchoring expectations rather than just reacting to transient fluctuations.
At the same time, the split vote and hawkish tone stresses that RBI is far from fully confident as far as taming inflation is concerned, particularly given the volatile global environment. It noted that monetary policy needs to stay disinflationary for a fuller transmission to lending rates. Currently, the 2.5 percentage point increase announced by the RBI is yet to be passed on fully to borrows by banks.