The Reserve Bank of India left the repo rate and stance changed at its April monetary policy review today, extending the status quo on these two parameters to fourteen months from February 2023. While the majority interpretation was that it was a business-as-usual policy with no surprises, an alternate interpretation could be that Governor Shaktikanta Das left minor dovish undertones in his statement explaining the policy.

"Two years ago, around this time, when CPI inflation had peaked at 7.8 percent in April 2022, the 'elephant in the room' was inflation," Das said in his statement. "The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis."

Among all the remarks about inflation, Das's key assertion in this policy statement was that the MPC was dealing with the last remnants of the inflation surge triggered by the COVID-19 pandemic and the war in Eastern Europe and West Asia, and that he could focus on the last mile of inflation because GDP growth is robust and does not require any central bank attention.

The next move from the RBI could be a change in its stance to neutral, followed by a cut. And that could follow after the US Federal Reserve begins its rate cuts.

The MPC meets next June 7, at which time the general elections will be concluded. The subsequent meeting is in August, at which time the new government could present its full budget. Clarity on fiscal policy, in addition to the Fed's moves, could prompt the RBI to signal rate cuts in India.

Elephant's Gone

With a 5-to-1 vote, the MPC decided to leave the repo rate unchanged at 6.5 percent and the monetary policy stance as "withdrawal of accommodation". The lone dissenter, external member Jayant Varma, again voted for a 25-basis-point cut in the repo rate and an easing of the stance to neutral.

Here are the key takeaways from Das's statement detailing the April MPC review:

• GDP and inflation forecasts for 2024-25 were retained at 7 percent and 4.5 percent, respectively. The quarterly forecasts were tinkered with. For instance, the inflation forecasts were lowered. Economists were comfortable with the inflation forecasts but felt the GDP numbers were optimistic as global growth could taper off.
• Since the last policy, the growth and inflation dynamics played out favourably, with growth surpassing projections.
• Core inflation has hit its lowest level in its current series, and fuel inflation has been in deflation for the last six months.
• Food inflation has been accentuated. The comfort over growth will help MPC keep its focus on inflation's fall to the 4 percent target and endeavour to be actively disinflationary.
• Last mile disinflation is proving to be challenging globally.
• The RBI is targeting fuller transmission of its 250-basis-point repo rate hike between May 2022 and February 2023.
• Worsening debt situations in advanced economies can generate spillovers for EMEs in the form of swings in capital flows and volatility in financial markets. India, which already has record-high FX reserves, will continue to build buffers.
• Rural demand and rising consumption will support Indian economic growth. The investment cycle will swing up, as evidenced by strong cement and steel production and the import of capital goods.
• RBI's surveys showed consumer confidence at a new high.
• Food price uncertainties continue to weigh on the inflation trajectory. After sustained moderation, firms see an upward bias in the cost-push pressures.
• India remains the largest receiver of remittances worldwide, and the cost of receiving inflows is coming down. As of March 29, 2024, India's foreign exchange reserves reached an all-time high of $645.6 billion. RBI will keep building reserves.

Future Path

• The RBI has maintained that the strong GDP growth gives it space to remain focused on bringing inflation to the targeted level of 4 percent.
• The central bank also remains worried about food inflation, especially in the context of warnings of heatwaves in India for the next three months.
• The RBI's main worry is that food inflation will spill over to other aspects of inflation.
• The key parameter tracked by the RBI is the year-ahead inflation, which is still at 4.5 percent and about 50 basis points higher than the target.
• The moot point is whether the RBI will wait till 2025-26 before cutting rates. For 2025-26, the RBI has projected a growth rate of 7 percent and an inflation rate of 4 percent.

So, will the wait for a rate cut continue until the next fiscal year?

The RBI will likely look at the momentum of inflation and now be as bull-headed about the headline number before cutting interest rates. That could start after the full budget presentation by the new government in July-August.

At this stage, the RBI sees no room for signalling rate cuts, but that space may open up once the Fed starts to cut rates and the new government is in place.

Reference used: https://indianexpress.com/article/business/economy/rbi-mpc-monetory-policy-meeting-repo-rate-shaktikanta-das-inflation-gdp-growth-9251464/

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