StoxBox: Views on RBI Monetary Policy

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The RBI has kept the repo rate unchanged, reflecting India’s sustained growth amid uncertainties in weather, geopolitics, and AI-led tech disruptions. Despite a buoyant economic growth outlook, the central bank refrained from revising inflation forecast upward due to elevated food inflation. Confident in its inflation management efforts, the RBI aims to move closer to its 4% target without disrupting liquidity. With resilient high-frequency and fiscal indicators bolstered by an all-time high forex reserve, the RBI is well-positioned to handle any unforeseen risks. However, it remains cautious, keeping inflation forecasts unchanged due to a hot summer and low reservoir levels impacting summer crops. Additionally, the RBI looked vigilant on microfinance institutions and NBFCs charging high interest rates on small loans. Notably, the RBI emphasized it will not mirror the Fed’s approach to interest rate cuts, thereby signalling a more nuanced and domestic-led approach to its monetary policy management. With most of the economic indicators suggesting the momentum in the economy to continue, we remain optimistic of further upwards revisions to the GDP forecast moving ahead. While it would be premature to expect a rate hike in the near term, we will continue to monitor the developments on the inflation front and remain in the camp of an expected rate cut in H2FY25.

Highlights of RBI Monetary Policy Meeting:

  • The MPC meeting outcome was in line with our expectations. A majority of 4:2 kept the repo rate at 6.5%. The SDF and MSF rates were unchanged at 6.25% and 6.75%, respectively.
  • The MPC decided by a majority of 4 out of 6 members to remain focused on withdrawing accommodation to ensure that inflation progressively aligns with the target while supporting growth.
  • The GDP growth forecast for FY25 was revised upwards to 7.2% from 7% estimated earlier, underpinned by a resilient global economy, rural demand improvement, healthy capacity utilization levels at industries, and robust business optimism. The GDP forecast for Q1, Q2, Q3, and Q4FY25 stood at 7.3%, 7.2%, 7.3%, and 7.2%, compared to 7.1%, 6.9%, 7%, and 7% estimated earlier, respectively.
  • The consumer price inflation forecast for FY25 was kept unchanged at 4.5%, with the outlook for agriculture and rural economy looking bright. Also, this year’s expectations of a normal monsoon forecast underpinned the inflation outlook. The consumer price inflation forecast for Q1, Q2, Q3 and Q4FY25 remained unchanged at 4.9%, 3.8%, 4.6% and 4.5%, respectively. However, the central bank remains guarded as the trajectory of key rabi crops, particularly pulses and vegetables, needs to be closely monitored given the recent sharp upturn in prices.

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