By Unmesh Kulkarni, Managing Director Senior Advisor at Julius Baer India

Like in the previous policy, there were no surprises in the August monetary policy, with the RBI Monetary Policy Committee (MPC) maintaining status quo on policy rates (repo rate @ 6.5 percent) as well as policy stance (withdrawal of accommodation).

A noticeable aspect in the Governor’s statement was the higher-than-usual emphasis on food inflation, which is acting as a drag on the intended downward trajectory of the headline CPI. While according to the RBI, headline CPI has been softening (June print at 5.1 percent), the extent and pace of the softening has been lower than their expectations, largely owing to the persistent high food inflation, which has trended close to 8 percent (annualised).

The Governor clarified as to why the MPC is laying great importance on the food inflation trajectory in its monetary policy considerations, when core inflation is comfortably down to a multi-year low level of 3.1 percent (and below RBI’s median target rate of 4 percent). Essentially, the MPC is of the view that food inflation plays an important role in determining inflation expectations of the common man, and this could potentially spill over to corporates in the form of wage pressure, and pursuantly to the broader economy. Besides, the RBI expects favourable base effects to wear off in subsequent quarters. The RBI has kept the overall inflation forecast for FY25 unchanged at 4.5 percent, although it has made some changes in the quarterly forecasts, raising the Q2 and Q3 forecasts while lowering the Q4 forecast.

Another takeaway from the Governor’s address is that while RBI is watchful of the global scenario, it does not want to simply follow the path of developed nation central banks, as it prefers to focus more on domestic inflation coming within its target range on a sustainable basis, which would have a longer-lasting positive impact on India’s growth trajectory.

On the growth front, the RBI finds that the domestic economy has been quite resilient on multiple fronts – healthy urban demand, improving rural consumption, robust manufacturing and investment, buoyant services, healthy PMI and IIP. Healthy balance sheets of banks and corporates, along with the ongoing government capex and pickup in private investment will drive the investment activity. The growth forecasts for FY25 have been left unchanged, with the full year at 7.2 percent and a slight reduction in Q1 forecast. Q1FY26 growth is also forecast at 7.2 percent.

What to expect, going forward

The trend across the past few MPC policies has been the focus on inflation containment on durable basis and reiteration of the 4 percent CPI target. The August policy was no different, with a lot more focus on food inflation, which makes the overall tone a bit ‘hawkish’. The Governor is probably trying to tone down market expectations with respect to timing of rate cut(s), especially in the context of rising global expectations of a rate cut by the Fed in September.

While we have been earlier expecting RBI to change course in Q4CY24, given however the emphasis on food inflation and hawkish tone of this policy, the timing of the first rate cut now looks to be more likely December or February. This would largely depend on the evolving prints of headline CPI (and not so much the core CPI), including food inflation, over the next couple of months.

One still needs to keep in mind that two of the MPC members have continued to vote for a rate reduction as well as a change in stance to neutral, indicating that the think-tank within the MPC is gradually turning attentive towards risks to growth. Besides, with global growth slowing down and the major central banks starting to cut rates (and likely to continue in CY25 as well), the MPC will need to bake these global trends, at some point in time, into their assessment of growth and consequent policy action and stance.

As we have been highlighting, yields in the Indian markets have peaked and started declining, although primarily at the longer end. Short-term rates continue to be elevated due to the active liquidity management by the RBI, resulting in flat yield curves. Short term rates should also start coming off, possibly in Q4CY24, as and when the markets start sensing a possible drift by the MPC in the coming policies. Long-term rates have already been in a declining trend, aided by the inclusion of Indian Government Bonds (IGBs) in the JPMorgan bond indices (and healthy buying of Indian debt by FPIs), reiteration of commitment to fiscal management by the Government and fall in global yields.

The domestic fixed income environment continues to remain conducive for investors.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.