With the economy showing strong growth momentum and retail inflation staying above the RBI’s comfort zone, majority of the rate-setting monetary policy committee (MPC) members are likely to vote for a status quo in the policy repo rate and continuation of the “withdrawal of accommodation” stance at their upcoming meeting.
- Also read: RBI seen keeping policy rates unchanged at the upcoming MPC meet on sticky food inflation
The six-member MPC has been on pause mode for over 17 months now. The last time there was a rate action was on February 8, 2023, when the repo rate was upped from 6.25 per cent to 6.50 per cent.
The committee is scheduled to meet from August 6 to August 8. This will be its third meeting of FY25.
At the June 2024 bi-monthly MPC meeting, four out of six members voted to keep the policy repo rate unchanged at 6.50 per cent. Ashima Goyal (Emeritus Professor, IGIDR, Mumbai) and Jayanth R. Varma (Professor, IIM, Ahmedabad) voted to reduce the policy repo rate by 25 basis points.
While four out of six MPC members voted to to remain focused on withdrawal of accommodation, Goyal and Varma voted for a change in stance to neutral.
In an event organised by a publication last month, RBI Governor Shaktikanta Das noted that the central bank’s nowcast team believes that the first quarter growth is 7.4 per cent, although the MPC projection is 7.3 per cent.
“And we see, even today, the growth momentum in the second quarter continues to be very strong. In the fourth quarter of last year, the growth was 7.8 per cent. The first quarter numbers will be released by the end of August.
Focus on inflation
“So, in the first quarter, the momentum of economic activity is strong. And we see clear evidence of that momentum being sustained in the second quarter also. So, growth is holding steady. Now, we have to, therefore, focus clearly and unambiguously on inflation,” Das said.
Headline inflation, as measured by year-on-year changes in the all-India consumer price index (CPI), edged up to 5.1 per cent in June 2024 from 4.8 per cent in May. Inflation has been above RBI’s 4 per cent target for 57th straight month.
Aditi Nayar, Chief Economist, Head of Research and Outreach, ICRA, noted that high growth in FY2024, combined with the inflation of 4.9 per cent in Q1 FY2025 are unlikely to shift the voting pattern of the four members who voted for a status quo in the June 2024 meeting towards a change in stance or rate cut in the August 2024 meeting itself.
She opined that if the food inflation outlook turns favourable on the back of a normal distribution of rains in the second half of the monsoon season and in the absence of global or domestic shocks, a stance change is possible in October 2024.
This could be followed by a 25 basis points (bps) rate cut each in December 2024 and February 2025, with an extended pause thereafter.
Aditi Gupta, Economist, Bank of Baroda, observed that the MPC is likely to hold repo rate steady for the 8th consecutive meeting. The stance of the monetary policy is also expected to be retained at withdrawal of accommodation. Incidentally, the stance of the monetary policy was last changed in June 2022.
Gupta reasoned that RBI is unlikely to be comfortable with the elevated levels of food inflation in the recent months. On the other hand, domestic growth impulse has been strong giving RBI the room to keep rates at current levels until it has sufficient confidence that inflationary pressures have subsided on a durable basis, she said.