By Unmesh Kulkarni, managing director senior advisor at Julius Baer India

The RBI monetary policy announcement was completely on expected lines. Almost the entire market was expecting a status quo on policy rates, and RBI did just that. There were some expectations building that RBI would start signaling a softening of its policy stance, however the Monetary Policy Committee (MPC) voted with a clear majority of 5:1 to continue with the “withdrawal of accommodation” stance.

In the MPC’s assessment, the growth-inflation dynamics has played out favorably, and the policy actions seem to be having the desired impact on bringing inflation down, while supporting growth.

RBI finds the current growth conditions quite favourable, primarily driven by industrial and manufacturing activity, along with buoyant services and urban consumption, and a recovering rural economy. The prospects for investment activity remain bright, fueled by rising capacity utilisation, improving business confidence, an upturn in private capex cycle, robust government expenditure and healthy corporate balance sheets. The RBI MPC’s forecast for GDP growth is largely unchanged (7 percent in FY25), with some minor tweaks in the quarterly numbers.

The MPC is quite satisfied that the inflation prints, especially the core CPI, have been on a downward trajectory. However, the Governor emphasised that there is considerable uncertainty around the food inflation trajectory, although healthy rabi production should alleviate conditions and a likely early monsoon should augur well for the kharif crop.

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The MPC would like to see (a) the headline CPI inflation come closer to 4 percent (the mid-point of its 2-6 percent tolerance band) and (b) a larger transmission of its rate actions into the financial system, and hence they are inclined to currently stay on hold.

The MPC has retained its CPI forecast for FY25 at 4.5 percent, but marginally brought down its inflation forecast in 3 out of the 4 quarters of the new financial year. Climate shocks pose upside risks to the inflation forecast, and the uptick in international oil prices needs to be monitored as cost push pressure is seeing upward bias.

Also read: RBI MPC highlights: FY25 growth forecast at 7%, CPI seen at 4.5%

RBI has been actively using the liquidity management route to bring down inflation, rather than raising rates any further. Liquidity conditions had tightened significantly during the first couple of months of the calendar year, but have eased during the month of March. RBI has been active on both fronts of conducting regular VRRR (variable rate reverse repo) auctions to drain out any surplus liquidity, and intermittent VRR (variable rate repo) auctions to infuse liquidity as and when necessary.

RBI’s liquidity management had resulted in the weighted average call rate reaching the MSF (marginal standing facility) rate of 6.75 percent (25 bps higher than Repo rate), which was an ‘indirect’ rate hike (without actually raising policy rates). This condition was reversed in March with easing liquidity bringing down call rates back to near the repo rate (an ‘indirect’ rate cut).

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We expect RBI to stay on hold through the next couple of policies (June and August), as it would like to see CPI inflation close to its near-term target of 4 percent. The current prevailing high growth environment gives RBI the space for focusing on inflation through liquidity management, without having much impact on growth. And as the Governor mentioned in his speech, it is essential that CPI continues to moderate; till then, the MPC’s task in unfinished.

The Fed is expected to start cutting rates from June and carry out possibly 75 bps of rate cuts in CY24. The ECB and Bank of England are also expected to follow on a similar path. We therefore expect RBI to carry out its first rate cut only in the last quarter of CY24 – most likely in the October policy. However, the rate cut cycle of the RBI is likely to be shallower than those of the global central banks, as there is still a backdrop of strong domestic growth, and RBI would like to wait it out and adopt data-determined policy actions after the initial rate cuts.

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