MPC keeps repo rate unchanged at its 1st meeting of FY25

The RBI’s rate setting panel, as was widely anticipated, stood pat on the policy repo rate in its first meeting of FY25 on Friday to ensure that volatile food prices don’t impede the ongoing disinflation process and retail inflation aligns with its 4 per cent target.

Governor Shaktikanta Das emphasised that the elephant (retail inflation), which has now gone out for a walk and appears to be returning to the forest, has to return to the forest and remain there on a durable basis. He said that though inflation has come down significantly, it remains above the 4 per cent target

Monetary Policy Committee (MPC) members decided by a 5 to 1 majority to keep the policy repo rate (the interest rate at which banks borrow funds from RBI to overcome short-term mismatches) unchanged at 6.50 per cent. MPC had maintained status quo on repo rate in all six meetings in FY24.

The members also decided by a similar majority to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Das underscored that “It is essential, in the best interest of the economy, that CPI inflation (which eased to 5.1 per cent during January and February 2024 from 5.7 per cent in December 2023) continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished.”

Keeping vigil

Looking ahead, the Governor observed that robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4 per cent.

“As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation.

“Under these circumstances, monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions,” Das said.

The Governor cautioned that high and persistent food inflation could unhinge anchoring of inflation expectations which is underway. Frequent and overlapping adverse climate shocks pose key upside risks to the outlook on international and domestic food prices, he added.

“The success in the disinflation process so far should not distract us from the vulnerability of the inflation trajectory to the frequent incidence of supply side shocks. Our effort is to ensure price stability on an enduring basis, paving the way for a sustained period of high growth,” the Governor said.

Rates cuts expected from Oct

Referring to RBI retaining its FY25 retail inflation projection at 4.50 per cent, SBI Chief Economic Adviser Soumya Kanti Ghosh opined that the outlook for inflation will largely be shaped by food price uncertainties (indications of a normal monsoon on one side while increasing incidence of climate shocks on other side).

“The good thing, however, is that with 4 per cent inflation target in FY26, the RBI is possibly guiding the market with a prolonged rate cut cycle.

“…We expect a series of rate cuts beginning October 2024, followed by another in December 2024 and possibly in February 2025. The stance change can happen in October itself,” Ghosh said.

Abheek Barua, Chief Economist and Executive Vice-President, HDFC Bank, observed that given the recent global resilience in economic activity, there has been a tendency to keep monetary policy tight to take on the last mile challenge on inflation by global central banks. The RBI seems to be moving in lock step with that.

“Despite its emphasis that inflation is moderating, the RBI kept its policy rate and stance unchanged in today’s policy announcement. The central bank remained optimistic on growth – pegging it (retained) at 7 per cent for FY25 – and said this provides space for monetary policy to remain tight and focus on inflation. Consequently, the chances of a rate cut have been pushed forward into the second half of FY25,” he said.

Inflationary pressure

Crisil’s Chief Economist Dharmakirti Joshi and Senior Economist Pankhuri Tandon observed that the MPC’s ‘inaction” was expected, as food inflation has been stubbornly high so far, even as core inflation – a better indicator of demand pressures – continues to trend down.

“We expect easing food inflation, coupled with benign non-food inflation, to bring headline CPI inflation to 4.5 per cent in this fiscal, under our base case – this is close to the RBI’s target of 4 per cent. That said, any weather disruptions and sustained uptick in crude oil prices will remain monitorable.

“The transmission impact of rate hikes since May 2022 and regulatory measures on risky lending are still playing out. This, coupled with fiscal consolidation, could lead to some moderation in GDP growth this fiscal,” they said.

Overall, the macroeconomic environment is likely to turn favourable for a rate cut by mid-2024, under Crisil’s base case, lest oil prices and monsoons play a spoilsport.