MPC stays put as growth-inflation mix evolves well

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept the repo rate unchanged for the seventh straight time in today’s meeting. The MPC is focussing on reducing inflation towards its 4% target, comforted by high gross domestic product (GDP) growth.

Given the uneven inflation trends, the MPC is awaiting clearer signs of easing towards the 4% target. Strong domestic growth momentum has provided it space to do so.

Food, the pain point for inflation last year, could ease if monsoon turns normal this year, as early weather forecasts suggest. Easing food inflation and benign non-food inflation should bring the headline inflation closer to the RBI’s target of 4%. That said, any unusual weather events and sustained uptick in crude oil prices will remain monitorable.

The transmission impact of past rate hikes since May 2022 and regulatory measures on risky lending are still playing out. We expect GDP growth and inflation in fiscal 2025 at 6.8% and 4.5%, respectively.

Overall, the macroeconomic environment is turning favourable for a rate cut in mid-2024, under our base case, lest weather and crude prices play spoilsport.

Highlights from April monetary policy review

• The MPC voted to keep the policy rates unchanged, with a 5-1 majority. The repo rate remains at 6.50%, standing deposit facility (SDF) at 6.25% and marginal standing facility (MSF) at 6.75%
• Status quo on the ‘withdrawal of accommodation’ stance, with a 5-1 majority vote
• The MPC’s retained its forecasts for Consumer Price Index (CPI)-based inflation (4.5%) and GDP growth (7.0%) for this fiscal