In the midst of lingering economic uncertainties, the RBI’s Monetary Policy Committee (MPC) has decided to keep the policy rate unchanged, adhering to the ‘withdrawal of accommodation’ stance. Despite market expectations for a shift to a ‘neutral’ stance, the committee remains vigilant in the face of challenges, emphasizing the need for disinflation in the last mile.
The MPC’s decision comes after the government’s emphasis on fiscal consolidation and infrastructure spending in the interim budget. With a five-to-one majority vote, the repo rate remains at 6.5 percent for the sixth consecutive time. The committee maintains its focus on withdrawal of accommodation, addressing uncertainties in food inflation and global geopolitical factors.
The global economic outlook remains uncertain, marked by geopolitical disruptions like the Russia-Ukraine war, Israel-Hamas conflict, and the Red Sea crisis. The MPC, however, expresses positivity regarding the domestic growth outlook, citing India’s resilience and momentum amid various shocks.
The Indian economy’s first advance estimates for FY24 indicate a real GDP growth of 7.3 percent, fueled by infrastructure development, ease of doing business, increased labor force participation, and improved fiscal spending. Projections for FY25 are optimistic, with a 7 percent real GDP growth, supported by various factors, including government capex and production linked incentive (PLI).
While headline Consumer Price Index (CPI) inflation moderated to an average of 5.5 percent during April-December 2023, concerns persist due to volatility in food prices and global shipping disruptions affecting commodity prices, especially crude oil. The RBI anticipates FY25 inflation at 4.5 percent, assuming a normal monsoon, with balanced risks.
The RBI governor emphasizes the stance of withdrawal of accommodation, aligning with the 4 percent inflation target on a durable basis. The commentary underscores the need for active disinflationary monetary policy. Liquidity conditions are expected to be managed with flexibility through repo and reverse repo operations.
While the Indian economy is performing well, inflation risks persist. The RBI’s proactive disinflationary approach aligns with its commitment to achieving the 4 percent inflation target. Expectations include a potential change in stance in Q1FY25 and a 50 basis points rate cut later in FY25. The RBI expresses comfort regarding long-term rates, reflecting positively on the duration play.