The MPC of RBI in its fourth bi-monthly meeting in the current fiscal, which concluded on October 9 decided to hold the policy repo rate unchanged at 6.5 per cent, with one dissent vote from one of its newly appointed members.
The stance of the policy was shifted to ‘neutral’ from ‘withdrawal of accommodation’ for the first time since June 2019. This decision was unanimous.
The outcomes of this meeting of the MPC are broadly in line with the market’s expectations, although on the issue of the stance of the monetary policy, some prominent analysts didn’t anticipate any change. Their argument has been that as things have evolved since the introduction of the flexible inflation targeting framework in 2016, the policy stance is more about providing future guidance than about money supply and liquidity. And in the recent past, the MPC has steered clear of providing any future guidance about its rate decisions.
Another aspect of the meeting’s outcome that has caught attention of the observers is the dissent vote by a member in favour of a cut in the policy rate by 25 basis points. In each of the last two meetings of the MPC, there were two dissenting votes for a rate cut.
However, with all the three external members being new this time, it was thought unlikely that any of them will vote against the three RBI officials on the MPC so early on. But the fact now is otherwise, which should be seen as positive for the reputation and credibility of the MPC. The equity market experienced some early gains after the policy announcement which were pared later on. The yield on the benchmark 10-year G-Sec moved a bit lower.
Growth, inflation prospects
In the lead up to the MPC meeting, a view was gaining ground on the back of a slower GDP growth of 6.7 per cent in the April-June quarter, below the RBI’s projection of 7.1 per cent, and signs of soft urban consumption that growth risks were getting tilted to the downside. Manufacturing PMI falling to an eight-month low and services PMI easing to a 10-month trough in September, 2024 supported this impression.
Against this backdrop, the general expectation has been that the meeting will provide insight into India’s broader economic growth trajectory.
Annual CPI inflation at 3.65 per cent in August remained below the target of 4 per cent for a second consecutive month. Notwithstanding the dip, as per a poll conducted by a wire agency a few weeks back, inflation was likely to rise again, averaging 4.5 per cent in FY 2024-25 and 4.3 per cent in the next fiscal. Food inflation has remained elevated at 5.65 per cent.
The MPC, however, has kept the real GDP growth projection for 2024-25 unchanged at 7.2 per cent, with the projection for Q1:2025-26 a tad higher at 7.3 per cent. The lower GDP growth number for the first quarter of the current fiscal is most possibly seen as an aberration caused by a fall in government expenditure due to the holding of parliamentary elections during that period.
Positive outlook
Going forward, the outlook for private consumption and investment seems good. On the whole, the MPC does not foresee any notable downside risk to the country’s growth trajectory in the foreseeable future. In other words, there is no slowdown story yet.
The MPC expects a significant pick-up in CPI inflation in September broadly in line with the conclusions of the poll referred to above.
However, it expects food inflation to ease by Q4:2024-25 on better kharif arrivals and rising prospects of a good rabi season. Input cost pressures are also likely to ease. Overall, CPI inflation for 2024-25 is projected at 4.5 per cent with Q2 at 4.1 per cent; Q3 at 4.8 per cent; and Q4 at 4.2 per cent.
CPI inflation for Q1:2025-26 is now projected at 4.3 per cent vis-à-vis 4.4 per cent in the last meeting. The very recent upturn in key commodity prices, especially metals and crude oil is possibly being seen as a source of risk to the inflation trajectory, as above. However, by the RBI’s own admission the last mile for durably aligning the headline inflation with the target of 4 per cent has not yet been traversed yet. The metaphorical ‘horse’ has to be tamed to stay inside the stable. Otherwise, it can bolt anytime.
What happens after the shift in stance?
Before the meeting, a good number of market analysts expressed an opinion that a shift in policy stance to ‘neutral’ would imply commencement of policy rate cuts later this fiscal itself. Some expect the rate to be cut by a cumulative 100 basis points by the end of December 2025.
However, no commensurate indications in this regard have been noticed in the movements in G-Sec yields and 1-year Overnight Index Swap rate. However, if the food inflation behaves well consistently and if there is no flare up in the crude oil price due to a marked escalation in the current geopolitical tension in the Middle East, the MPC is likely to slash the policy rate by 25 basis points either in Q4: 2024-25 or in Q1: 2025-26.
The 51st meeting of the MPC also marked eight years of its existence. The adoption of flexible inflation-targeting framework was indeed a significant structural reform. It altered and set right many of the inadequacies and imperfections of the conduct of monetary policy in the past. Equally importantly, it irreversibly reset the institutional relationship between the RBI and the Central government.
Fiscal dominance over monetary policy has largely ended, as a result. One hopes that the same benefit will extend to the conduct of the RBI’s policies for the financial sector in the foreseeable future.
The writer is a former central banker and a consultant to the IMF. (Through The Billion Press)