RBI Monetary Policy Preview: Yet Another Status Quo

India's Monetary Policy Committee is likely to maintain status quo on the Reserve Bank of India's key lending rate amid the continuing need to bring down inflation further, even as economic activity remains strong.

All economists polled by Bloomberg expect the MPC to hold the Reserve Bank of India's repo rate steady at 6.5% on Friday.

Since the last policy in February, the monetary policy committee will evaluate easing inflation, resilient economic activity, onset of monsoon, international oil prices, and global geopolitics.

"We continue to expect the window for a rate cut to open only in December 2024, with the central bank noting solid growth, which allows it to focus solely on inflation," stated a research note by Barclays. Credit conditions still do not show signs of overtightening, it said.

CPI Inflation

Retail inflation stood at 4.83% in April, as compared with 4.85% in March and 5.1% in January and February. Inflation has been within the central bank's tolerance band of 4% (+/-2%) since September.

However, food and beverage inflation remains high, having come in at 7.9% in April. CPI inflation for fiscal 2025 is projected at 4.5% with Q1 at 4.9%, according to the RBI's April projections.

Economic growth, too, continues to print stronger than expected. GDP grew by 7.8% in the January-March quarter, while GVA, that excludes indirect tax and subsidies, grew 6.3% during the period.

For the full year, GDP is estimated to have grown by 8.2%.

GDP was estimated to increase by 7% in the fourth quarter, according to economists polled by Bloomberg. GVA growth was pegged at 6.2%.

For the full year, a Bloomberg poll of economists estimated GDP growth at 7%.

Liquidity

India's interbank liquidity has been somewhat of a hindrance for markets, given its tight nature, stated a research note by Nomura. The government tried to address this via buybacks and with a slower T-bill calendar. The bumper RBI dividend has also brought liquidity back to focus, the brokerage said. "We are turning more positive on the outlook for liquidity over coming weeks, largely on account of FX inflows, government redemptions and coupon payments."

Bond Yields

India's new benchmark security has shown a considerable degree of softening bias in May this year and eased below the 7% mark. RBI's bumper surplus, FPI inflows and an outlook upgrade by S&P were the primary drivers of the exuberance seen in the government bond markets in May, the Bank of Baroda.

Going forward, India's 10-year yield is expected to remain in the range of 6.95%-7.05% in June, led by lower US yields and further FPI investment in debt securities ahead of index inclusion, it explained.