RBI Monetary Policy February 2024

In the February 2024 meeting, the RBI Monetary Policy Committee (MPC) decided to hold the repo rate at 6.5% and retained the policy stance. The monetary policy remains ‘actively disinflationary’ to ensure durable alignment of headline inflation to the 4% target. The stance remains unchanged because the transmission of rate hikes to the credit market is incomplete.

The RBI Governor mentioned that uncertainties in food prices continue to affect the headline inflation trajectory, and the MPC will carefully monitor any signs of generalisation of food price pressures that could erode the gains in easing core inflation. Additionally, the Governor noted that liquidity conditions are driven by exogenous factors (high government balances), and the Reserve Bank aims to deploy an appropriate mix of instruments to modulate both frictional and durable liquidity.

The RBI projects FY25 inflation at 4.5% YoY while retaining the FY24 forecast at 5.4%. Satisfactory rabi sowing and seasonal vegetable price correction augur well for the inflation trajectory. However, adverse weather events and supply chain disruptions due to geopolitical tensions pose upside risks.

The RBI forecasts FY25 real GDP growth at 7% YoY. Household consumption is anticipated to strengthen. Prospects for fixed investment remain promising due to an upturn in the private capital expenditure cycle, improved business sentiments, robust balance sheets of banks and corporates, and the government’s sustained emphasis on capital expenditure. However, the growth outlook faces headwinds from geopolitical tensions, volatile financial markets, and geo-economic fragmentation.

We expect the RBI to maintain a pause until at least the June 2024 policy. The Rabi season production and IMD monsoon forecasts for 2024 are key events to watch for assessing the trajectory of food inflation. Given the comfort regarding GDP growth, monetary policy will remain committed to achieving the inflation target. The RBI is also likely to maintain liquidity at close to neutral levels due to financial stability and inflationary risks associated with excess liquidity, and to keep overnight rates aligned with the repo rate.

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