RBI Monetary Policy: MPC Commentary Indicates A Long Pause, Say Economists
The MPC's pause and it's commentary on inflation appears to suggest that the central bank is unlikely to pivot soon.
The Monetary Policy Committee's pause and its commentary on inflation appear to suggest that the central bank is unlikely to pivot soon.
India's MPC decided to keep the benchmark repo rate unchanged for the second straight meeting, even as it emphasised the need to bring inflation closer to the target of 4%.
‘Goldilocks’ Pause
This was a ‘Goldilocks’ pause for the RBI, said Aurodeep Nandi, India economist and vice president at Nomura. In the run-up to the policy meeting, the economy finds itself in a fortuitous ‘Goldilocks’ macro situation, with better-than-expected Q4 FY23 GDP growth and inflation tracking closer to the RBI’s mid-point target of 4%. Hence, the macro conditions remained conducive for the RBI to pause and reinforce its FY24 forecasts for GDP growth at 6.5% and a slightly lowered CPI inflation rate of 5.1%.
"Our macro view, though, remains that both growth and inflation are likely to undershoot the RBI’s projections in FY24."
Still Early To Pivot
As the RBI expects inflation to remain within its target range for the rest of the fiscal and with growth faring reasonably well, the central bank will stay on hold through the rest of FY24, said Rahul Bajoria, managing director and head of emerging markets—Asia (ex-China) Economics, Barclays.
This second straight pause suggests to us that the RBI has reached this cycle’s peak repo rate, he said. "However, we do not believe a policy pivot, where RBI would start signalling cuts, is coming soon. As such, we see RBI remaining on hold through FY24, only seeing a window for rate cuts opening in Q1 FY25 (April–June 2024)," he said.
As an inflation-targeting central bank, the RBI would likely want to watch for signs of sustained disinflation, with headline inflation and, ideally, core inflation also nearing its medium-term target of 4%. The central bank should have fewer concerns about growth, as interpreted through its policy statement on the growth outlook.
The RBI will also watch for a turn in the global monetary cycle, Bajoria said. Even though the RBI may not have a specific interest-rate differential in mind, with the Fed and ECB not cutting rates any time soon—markets do not expect Fed or ECB cuts this year—it will likely see little reason to do so as well, especially with decent growth momentum being sustained for now.
Emphasis On Inflation Target
Interestingly, despite lowering the Q1 FY24 CPI inflation forecast by 50 basis points, the CPI projection for the full year was kept almost unchanged, said Siddhartha Sanyal, chief economist and head of research at Bandhan Bank. As expected, the RBI underscored that the vigil on inflation will remain strong, emphasising the need to reach the CPI target of 4% rather than merely staying within the tolerance band. The emphasis on achieving the 4% target and keeping the stance of policy unchanged at "withdrawal of accommodation" likely pushed out expectations of rate cuts at the margin.
"Overall, the central bank is expected to keep the repo rate unchanged for several quarters, likely beyond the current calendar year. Monetary policy in India of late has been prudent, decisive, and often front-loaded, a trend that is likely to continue in the foreseeable future," Sanyal said.
