Trends & Tides – RBI Monetary Policy April 2024

In the April 2024 meeting, the RBI Monetary Policy Committee (MPC) decided to hold the repo rate at 6.5%. The policy stance also remained unchanged, with the MPC committed to aligning inflation with the 4% target on a durable and sustainable basis. The monetary policy continues to be ‘actively disinflationary’ as robust growth provides policy space for the MPC to focus on inflation.

The RBI Governor highlighted that food inflation continues to exhibit considerable volatility, impeding the ongoing disinflation process. He added that high and persistent food inflation could undermine the anchoring of inflation expectations. The Governor stressed the need to “ensure price stability on an enduring basis”. He also mentioned that “the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation”.

The RBI forecasts FY25 CPI at 4.5% YoY and stresses food price uncertainty. On the positive side, there are expectations for record wheat production and indications of a normal monsoon. Conversely, challenges include increased cost-push pressures, low reservoir levels, recent spikes in crude oil prices, and adverse climate events.

The RBI maintains the FY25 GDP growth at 7% YoY. Anticipated normal monsoon conditions, buoyant business and consumer confidence, and signs of improvement in private capex should support growth. However, geopolitical tensions, geoeconomic fragmentation, disruptions in the Red Sea, and extreme weather events pose downside risks to growth.

Liquidity conditions have turned to surplus due to heavy government spending. Debt FPI inflows, driven by index inclusion, should also support liquidity conditions. However, the RBI will likely maintain liquidity close to neutral due to financial stability and inflationary risks associated with excess liquidity. Thus, Open Market Operation (OMO) sales by RBI cannot be ruled out.

We expect a shallow rate-cut cycle of 75-100 bps in FY25. Assuming a normal monsoon forecast by IMD, the RBI could consider changing the policy stance to ‘neutral’ in the June or August MPC meeting.

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