The Monetary Policy Committee (MPC) acted along expected lines by holding the repo rate steady at 6.5 per cent for the eighth consecutive time. While two MPC members out of six voted for a rate cut, the MPC was perhaps persuaded by a range of factors to stick to a wait-and-watch approach, in terms of the rates as well as its stance of ‘withdrawal of accommodation’. Perhaps, the biggest implicit factor is the context. It makes sense not to rock the boat till the new coalition government settles down.
Reserve Bank of India Governor Shaktikanta Das, in his statement on Friday, also took a circumspect view on inflation, citing the firm trend in global commodity prices this fiscal. He retained the April inflation forecast for FY25 of 4.5 per cent, which is above the MPC’s comfort zone of 4 per cent. The MPC’s pre-emptive approach in managing inflation is likely to send a positive signal to bond investors on softer liquidity conditions and stable rates in the months ahead – a crucial factor in the context of the inclusion of Indian government securities in the JP Morgan Global Bond Indices with effect from this month. As if to buttress the case for a status quo on both rates and its stance, the MPC also raised its growth projections for FY25 by 20 basis points to 7.2 per cent over its April policy. The Governor’s statement cites high frequency indicators this fiscal, and rising private investment and rural demand to explain this upward revision. There has been a 16.3 per cent growth in retail two wheeler sales in April-May; a 10 per cent rise in GST revenues in May and a 14.3 per cent drop in demand for the Mahatma Gandhi Rural Employment Guarantee Scheme, which suggests lower rural distress; an expansion in steel and cement production, among others. Above all, the monsoon is expected to be above normal. A 15 per cent growth in bank credit in FY24 does not appear to suggest any credit constraint at prevailing rates.
With growth looking good at existing rates of interest, and the ‘elephant of inflation’ retreating rather slowly into the forest, the case for a rate cut now never looked very strong. However, a shift in liquidity management stance to neutral can be considered in August, once market volatility peters out and the Budget provides some clarity on the fiscal roadmap. A rate cut to keep up capex and investor sentiment can follow once inflation retreats.
The RBI Governor was at pains to stress that monetary policy did not take cues from external forces (in other words, the Federal Reserve), but were a response to domestic growth and inflation dynamics. Indeed, the rupee remained stable against the dollar this fiscal, despite capital outflows. There can be no denying the global confidence (setting aside the rating agencies) in India’s macro fundamentals. With a rising gold component in India’s $652 billion forex reserves, India has more wiggle room than before to implement an independent monetary policy.