On Thursday, the Monetary Policy Committee of the Reserve Bank of India left the repo rate untouched at 6.5%, keeping with market expectations. But, contrary to expectations, it also left the policy stance unchanged, taking care not to put rate cuts on the table anytime soon.

This means the chances of rate cuts in the remainder of the financial year are slim, whereas rate increases remain possible.

So by when will the RBI cut rates? While the swap market is expecting rate cuts in the February 2024 policy review, the chances are that the MPC could hold rates till elections in May 2024. The best-case scenario could be the April MPC review.

Before we argue on the reasons for the delay in rate cuts, here is the crux of the MPC's June review:

RBI has used the flexibility of the 2-6 inflation band to tolerate inflation staying above the primary target of 4% due to COVID and Ukraine war-related supply disruptions. Now that there is greater certainty, the MPC would aim to drag inflation to its primary target of 4% to protect long-term growth by keeping the repo rate at 6.5% or higher, if needed.

Governor Shaktikanta Das was emphatic in his statement about what he and the MPC are now targeting.

He stated:

"Let me re-emphasise that headline inflation still remains above the target and being within the tolerance band is not enough. Our goal is to achieve the target of 4%, going forward. As Mahatma Gandhi had said "The ideal must not be lowered." The continuation of the stance of withdrawal of accommodation should be seen from this perspective".

For those waiting for the MPC to cut interest rates or signal such a move, Das's statement suggests that the threshold for rate cuts is inflation staying at 4%.

Another important takeaway from the MPC June review is the Goldilocks scenario: Inflation is easing and growth is running strong. The MPC marginally lowered the inflation forecast to 5.1% from 5.2% and retained the GDP growth projection for 2023-24 at 6.5%. The MPC's estimates for both growth and inflation are above the market's expectations.

This also points to MPC not having to contend with any pressure to cut rates in order to support growth.

The worry for Das and MPC is that inflation could rise again as demand conditions are still strong.

Governor Das, uncharacteristically for a central banker, highlighted the doubling of credit card outstanding to buttress the point about consumption-led demand lending support to growth. This is uncharacteristic because credit card spends are unsecured loans, and usually any surge raises red flags for the regulator.

ELECTIONS, RATE CUTS

The MPC and the RBI would want the deposits to continue accruing, given that real interest rates have now turned positive. Financial repression is an unsaid challenge the central bank would like to address.

Moreover, credit has risen at a 15.4% rate year on year, whereas deposits have risen only a pace of 10.9%, data till the middle of May has shown.

The RBI would want the past rate hikes--250 basis points between May 2022 to February 2023--to work through the system on credit and deposits. The RBI will particularly eye deposit rates and deposit accretion.

While the RBI lowered its inflation projections, risks to the upside are material, particularly due to concerns over monsoons. According to reports, an Australian weather body sees a 70% chance of an El Nino this year, raising its criteria to "alert" from "watch".

A day before the MPC statement, the government had raised the minimum support prices. The rise was decent and could support farmers if El Nino takes root. It remains to be seen if more support to farmers could be in the offing ahead of elections which could prove to be inflationary.

The RBI had said it expects an 8-10 basis point hit to inflation from the MSP price increase.

As elections draw near, the incumbent government often opens its purse strings through various schemes. The monetary policy will have to operate like a counterbalance to keep inflationary pressures in check.

It is most likely that RBI officials on the committee will weigh on the rest of the members not to lower their guard as that could result in inflationary pressures building again and hard-won control over inflation being frittered away with premature easing.

Yet another factor that could delay rate cuts is the move by the US Federal Reserve. The RBI will not change its stance till the Fed is raising rates as that could hurt capital inflows into India.

While it may not wait for Fed to cut rates to follow suit, the RBI will look to match the US central bank at least on the direction and on the tonality of the stance.

The RBI opted for a hawkish pause in its June review. It wanted to ensure that the market resets its rate-cut expectations. It would not like the market to price-in rate cuts as that could dilute the efforts of the last one year.

The RBI will keep interest rates steady and liquidity marginally tight. Banks' lending and deposit rates still have room to rise.